Annuities Tax Treatment

Publications and Resources

A Woman's Guide to Annuities. Retirement tends to be a bigger challenge for women: lower lifetime earnings equal lower retirement income. Women also live longer than men and must make income last for a longer period of time. Annuities may help women overcome retirement obstacles.

The Individual Annuity: A Resource In Your Retirement. This guide has been prepared to help retirees understand what an individual annuity contract is, what options are available, and how the right choice might enhance retirement security.

Individual Annuities: Purchasing Tips. An annuity is a long-term financial contract. You should enter into an the annuity arrangement only after a thorough review of your personal finances and retirement goals. To help you better understand what to consider before purchasing, review these tips.

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Because taxes are deferred until money is withdrawn or received as income, there are tax penalties for early withdrawal.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before you reach age 59 ½, you will trigger a 10 percent federal tax penalty on the earnings portion of the amount withdrawn.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.

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.


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