What To Know About Annuities Before Tax Day
March 24, 2026
With Tax Day just around the corner, many Americans are reviewing their income, deductions, and retirement accounts — including any annuities they may own. Because annuities grow tax-deferred over time, they’re designed for long-term retirement planning, not last-minute tax strategies.
So how are annuities taxed exactly? Here’s a quick refresher as April 15 approaches.
How Are Annuities Taxed?
Different annuities are taxed differently. Qualified annuities are funded through an existing 401(k) or other retirement account with pre-tax dollars. Upon withdrawal, funds are taxed like regular income.
Non-qualified annuities are purchased as a separate contract with after-tax money. That means that when funds are withdrawn, only the earnings are taxed (and not the original contributions). Non-qualified annuities use the LIFO tax method — “Last In, First Out.” This means that earnings are to be withdrawn first and taxed as ordinary income. Only when this is exhausted will the original principal be withdrawn.
Keep in mind that if you withdraw funds before age 59½, you may incur a 10% penalty from the IRS.
What Is Tax-Deferred Growth and Why Does It Matter?
A great benefit of annuities is that they’re tax-deferred. “Tax-deferred growth” means earnings grow over time without being taxed until funds are withdrawn. Annuities don’t eliminate your taxes — they simply defer them.
This is a plus because annuities aren’t burdened with annual taxation when they’re in the accumulation phase. Other financial vehicles, like brokerage accounts, are. Brokerage accounts may be subject to tax on dividends, interest, capital gains, and any profits realized annually.
When taxes are deferred over a long period, as with an annuity, the account can accumulate more growth. Your earnings begin to generate their own earnings, and benefits compound over time. When accounts are taxed annually, as with brokerage accounts, this compounding effect can slow.
Let’s say Jackie and Joey each invest the same amount of money for retirement. Jackie chooses a financial vehicle that defers taxes for 20 years, while Joey chooses a product taxed annually. After 20 years, Jackie will end up with a higher balance because her money compounded faster. Annual taxation reduces the base amount each year, slowing down Joey’s compounding.
The longer you have to plan for retirement, the better you can reap the benefits of deferred taxes and compounding. Annuities offer tax-efficient growth, lifetime income, and the ability to manage risk despite market volatility.
Can Annuities Help Reduce Taxes in Retirement?
Annuities may help manage the timing of taxable income, but they are not universal tax shelters. If you’re worried about taxes, you can layer your income streams and keep your payouts within a certain tax bracket.
Choosing when to draw on an annuity versus Social Security or other investments allows you to not only control your tax bracket but also to create a predictable cash flow through structured lifetime income.
Remember, annuities work best as just one piece of a broader retirement income strategy.
What Should You Review Before Tax Day?
Think of Tax Day as an annual checkpoint to reassess your retirement strategy. It’s a perfect time to review beneficiary designations, contribution sources (whether qualified or non-qualified funds), and withdrawal timing. If needed, reach out to a financial professional for assistance.
Proactive planning builds long-term confidence and peace of mind. When you set aside a few moments each year to make sure you’re on the right track, you’ll be able to move forward feeling prepared and empowered.
Smart Tax Planning Starts Before April 15
Annuities play an important role in your long-term retirement strategy, thanks to tax-deferred growth and structured lifetime income. And when you understand the tax implications of your entire portfolio, you can prevent unpleasant surprises later.
At 1891 Financial Life, we specialize in providing tailored insurance solutions that cater to diverse needs. Our team is equipped to help you navigate these challenges with expertise and compassion. Contact us today for personalized assistance, to explore your options, and to learn more about annuities and retirement planning.
FAQ on Annuities and Taxes
Are annuities taxed every year?
Qualified annuities are not taxed until you begin withdrawing funds. With non-qualified annuities, only your earnings are taxed upon withdrawal and not the original principal.
Do you pay taxes on annuities before withdrawal?
Annuities are tax-deferred financial vehicles, meaning funds are not taxed until you begin withdrawing funds.
What happens if you withdraw money early from an annuity?
If you remove funds before age 59½, you may incur a 10% penalty from the IRS. Funds that are withdrawn may also be subject to early withdrawal charges from the annuity issuer.
About 1891 Financial Life
Our culture is about looking out for you, for others, for family, for the community. That is how we go “Beyond Life Insurance.”
At 1891 Financial Life, we don’t just sell policies, we offer possibilities. We take pride in giving back to the communities we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits, along with social, educational, and volunteer programs designed to respond to community needs. Our commitment to excellence has been recognized by Forbes, naming 1891 Financial Life among “The World’s Best Life Insurance Companies” in 2023 - and for the second time, as one of “America’s Best Life Insurance Companies,” ranking #1 in Term Life Insurance for 2026.
Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs, no matter what stage of life you’re in.