Before 1986, the interest (within fixed annuities) or earnings (in variable annuities) that accrued in non-qualified annuities was not currently taxed, regardless of ownership. Instead, taxation was deferred to a future date when the interest or earnings would be withdrawn from the contract.
Since 1986, however, cash accumulations in corporate-owned annuities are no longer tax-deferred, but are taxed as if they were interest earnings. This has removed the favorable tax treatment of corporate-owned deferred compensation plans for employees. Tax-deferred cash accruals continue for annuities owned by natural persons.
Qualified annuities are entitled to all of the tax benefits and penalties of qualified plans. Thus, earnings on qualified annuities are not taxed until withdrawal.
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