Annuity earnings grow tax-deferred. When you withdraw money from a non-qualified annuity, the earnings are taxed as ordinary income (LIFO — last in, first out). Qualified annuities (held in an IRA or 401(k)) are taxed when you withdraw. Annuity death benefits paid to beneficiaries are taxed as ordinary income.
Key Points
- Annuity earnings: grow tax-deferred
- Non-qualified annuity withdrawals: earnings taxed as ordinary income (LIFO)
- Qualified annuity (IRA/401(k)): taxed when you withdraw
- Death benefits: taxed as ordinary income to beneficiaries
- An independent agent can help you understand annuity tax treatment