Generally, annuity income is treated as follows:
- If funding with a traditional IRA or 401k, the entire annuity payment is taxable as ordinary income. Click here to learn more.
- If funding with a Roth IRA or Roth 401k, the entire annuity payment is non-taxable. This assumes you meet two qualifying requirements: 1) You have held the Roth IRA for more than 5 years since it was first funded and 2) You are older than 59½. Click here to learn more.
- If funding with non-qualified/taxable assets, a portion of each annuity payment is considered a tax-free return of the initial investment amount and the remainder of the payment is taxable as ordinary income. When the lifetime income benefit rider is activated, a LIFO (Last In First Out) accounting method is applied and gains come out first and are taxed, then return of principal comes out tax-free and finally the rest of the income becomes fully taxable. If you choose to annuitize your contract, different tax treatment may apply.
Note: Everyone's particular tax circumstances are unique. Kindur is not a tax advisor and any information in these FAQs should not be considered tax advice. Please consult a tax professional if you have any questions about your situation.