Payouts will be taxed in different ways depending on whether you have a qualified or non-qualified annuity. In the first case, this is basically some kind of retirement plan and will be privy to all tax benefits/penalties Congress established. Benefits include: no payment of income tax on withdrawal of nondeductible/after-tax amount imputed into the plan; investment earnings aren’t taxed until withdrawal. However, money withdrawn from this plan before 59½ renders a 10 percent penalty on amount withdrawn as well as regular income tax (with some exceptions). At 70½ withdrawals need to be taken in minimum amounts set out by tax law (with some exceptions).
In the second case, after-tax dollars are used for purchase which has the advantage of tax deferral on earnings but tax is paid on withdrawals from earnings on original investment. Taking money out before 59½, incurs the 10 percent penalty on part of withdrawal representing earnings. Only from 70 ½ are you subject to the minimum distribution rules applicable to qualified plans.
In addition, beneficiary/heirs may be liable to taxes if the annuity continues after your death.
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