Taxation Of Individual Annuities
An individual annuity purchased from a commercial insurer is a nonqualified annuity. A nonqualified annuity is an annuity that does not meet the Internal Revenue Code requirements for employer benefits. As such, it does not qualify for most income-tax benefits that qualified employer retirement plans receive.
Premiums for individual annuities are not income-tax deductible and are paid with after-tax dollars. However, the investment income is tax deferred and accumulates free of current income taxes until the funds are actually distributed.
The taxable portion of any distribution is taxable as ordinary income. In addition, the taxable portion of a premature distribution before age 59½ is subject to a 10 percent ...
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