The conditions outlined below apply to deferred and immediate annuities under federal law. Annuity earnings may also be subject to state tax considerations; check with a local tax advisor for information about the tax laws in your state. Deferred annuity Earnings on a deferred annuity accumulate free of federal income tax. When you begin to receive income payouts (or withdraw money), the portion that came from earnings on the annuity is taxed as ordinary income. Because taxes are deferred until money is withdrawn or received as income, there are tax penalties for early withdrawal. If you withdraw money from a deferred annuity before you reach age 59 ½, you will trigger a 10 percent federal tax penalty on the earnings portion of the amount withdrawn. You also must pay income tax on those earnings. The tax penalty does not apply to certain lifetime payouts, death benefits, or payments made if you become disabled. Other exceptions also may apply. Immediate annuity If your immediate annuity was purchased with after-tax dollars, the portion of the payout you receive that represents your initial contribution will not be taxed. Earnings on the annuity will be subject to ordinary federal income taxes.