How Is a Non-Qualified Annuity Taxed?

The Annuity Man

There are many types of annuities, and all of them can be held inside of a Traditional IRA, Roth IRA, or non-IRA account.  IRAs, 401ks, and 403b type retirement structures are referred to as "qualified" accounts.  Non-IRA or cash type accounts are referred to as "non-qualified" accounts.

Depending on the type of annuity, money coming out of that annuity in a non-qualified account is typically taxed at ordinary income levels.  For Multi-Year Guarantee Annuities (MYGAs) that offer an annual interest rate like a CD (Certificate of Deposit), taking that interest as income would be taxed LIFO (Last In First Out)...or gains ordinary income levels.  If you don't take money out of a deferred annuity like a MYGA, it grows tax-deferred.

Lifetime income guarantee annuity types like Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) are annuitized strategies.  Their income stream is a combination of return of principal plus interest, so in a non-qualified account, only the interest is taxable at ordinary income levels.  The principal part of that income stream is not taxable. 

Income Riders attached to deferred annuities like Fixed Index Annuities (FIAs) and Variable Annuities (VAs) create a lifetime income stream that is taxed LIFO (Last In First Out) at ordinary income levels as well.

The bottom line is that our friends at the IRS are going to get paid their share when money is taken out of an annuity policy via interest, withdrawal, or income.  Never believe anyone that tells you otherwise when it comes to the taxation of annuities.

Contact Stan The Annuity Man to get the best national quotes of all annuity types for your specific situation, and to see the best MYGA fixed rates for your specific state of residence .


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