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    Taxes & Annuities

    Are Annuities Taxable?

    Annuities are tax-deferred — but they're not tax-free. Understanding how and when they're taxed helps you plan smarter and avoid surprises.

    Tax forms and annuity statement on a desk
    Annuities defer taxes during growth and tax earnings on withdrawal.

    How Tax Deferral Works

    Money inside an annuity grows without being taxed each year. You only owe tax when you withdraw earnings or receive income payments — letting your money compound faster.

    Qualified vs Non-Qualified

    If your annuity is funded with pre-tax money (IRA/401(k)), all withdrawals are taxed as ordinary income. If funded with after-tax money, only the earnings portion is taxed.

    The "Last-In, First-Out" Rule

    For non-qualified annuities, withdrawals come out of earnings first — and are fully taxable — until you reach your original principal.

    Annuitization & the Exclusion Ratio

    When you annuitize, each payment is split between a return of principal (tax-free) and earnings (taxable), based on an exclusion ratio defined by the IRS.

    The 10% Penalty

    Withdrawals before age 59½ may face a 10% federal penalty in addition to ordinary income tax.

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