Although rules vary based on the type of annuity and how you elect to receive your money, the tax rules are not as complicated as many seem to believe. Kimberly Lankford wrote an article called ‘How Annuities Are Taxed’ which explains the taxation of annuities is an easily understood manner. In it, she highlights the various annuity types and gives insightful examples to support her explanations.
Overall, the major theme is that all proceeds annuities that are purchased with pre-tax funds will be taxed at your ordinary tax rate. For annuities purchased with after-tax dollars, you will be taxed only on the portion of payouts above your principal. The exact calculation to determine the taxable amount of each incremental payout varies depending on the specifics of your annuity and payment plan. To see the full article, please click here.