Payments from annuities are generally taxable; however, the tax rate depends on the source of the funds. Distributions from annuities paid for by tax-deductible contributions are fully taxable at the recipient's then current income tax rate.
Distributions from annuities paid for by non-tax deductible funds are subject to special treatment because some of the periodic payment is actually a return of capital invested and this is not taxable, just the interest or investment gain portion is taxable at the recipient's then current income tax rate. Some penalty taxes may be due if payments go to someone less than age 59 1/2 or if someone over 70 1/2 takes less than the amount mandated by IRS from a retirement plan.
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