Annuity distributions may be taxable depending on the type of annuity and the source of the funds used to purchase the annuity. Here are some key points to consider:
Immediate Annuities: If you have an immediate annuity, the portion of each payment that represents earnings is taxable as ordinary income. This is because the earnings have not been previously taxed.
Deferred Annuities: For deferred annuities, the taxation of distributions depends on whether the annuity was purchased with pre-tax or after-tax funds. If purchased with pre-tax funds (such as from a traditional IRA or 401(k)), the entire distribution is generally taxable. If purchased with after-tax funds, only the earnings portion of the distribution is taxable.
Qualified Annuities: If the annuity is held within a qualified retirement account, such as an IRA or 401(k), the distributions are generally taxable as ordinary income when withdrawn.
Non-Qualified Annuities: Distributions from non-qualified annuities are taxed based on the ordering rules, which determine the tax treatment of each distribution based on the source of the funds used to purchase the annuity.
It's important to consult with a tax professional or financial advisor to understand the specific tax implications of annuity distributions based on your individual circumstances.