If your annuity is a qualified annuity, meaning an annuity purchased with money that has not been taxed, it is considered a qualified annuity. These categories of annuities are typically funded with money from 401(k)s or other tax deferred retirement accounts, such as traditional IRAs. Once you begin withdrawing money or receiving payments from a non-ROTH qualified annuity, the money received becomes fully taxable as income. This is because the money you used to fund the annuity has never been taxed.
If you purchased your annuity with after-tax funds, it is a non-qualified annuity. After-tax money means the money used to purchase the annuity has already been subject to tax. In a non-qualified annuity, only the earnings are taxed. Withdrawals from a non-qualified deferred annuity are taxed on a Last In, First Out (LIFO) basis, meaning that the interest and other other earnings that have accumulated in the annuity are considered to be withdrawn first, before you get any of your tax-free principal back.
Once you have annuitized your non-qualified annuity, the payments are a combination of taxable earnings and non-taxable principal.
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