What are the tax implications of an annuity?

The tax implications of an annuity depend on various factors. Generally, annuities are tax-deferred investments, meaning the gains are not taxed until withdrawn. Contributions made with pre-tax dollars are fully taxable, while those made with after-tax dollars are partially taxable. When funds are withdrawn, the growth is subject to income tax rates, and penalties may apply if taken before age 59½. However, if the annuity is purchased with after-tax dollars and meets certain requirements, a portion of the withdrawal may be considered a return of principal and not subject to taxation. Inherited annuities have different tax rules. It is essential to consult a tax advisor to fully understand the specific tax implications based on individual circumstances.