How Are Annuity Payments Taxed in Retirement?

Short Answer

Annuity payments are generally taxable under current rules when income is received in retirement.

What Is Annuity Income in Retirement?

Annuity income refers to retirement payments received from contracts such as:

• Social Security
• Pension income
• Single Premium Immediate Anuities
• Deferred Income Annuities
• Qualified Longevity Annuity Contracts
• Income Riders
• Interest payments from MYGAs

These payments represent retirement income hitting a checking account.

How Annuity Income Works Under Current Rules

Under current rules, income received from pensions, Required Minimum Distributions, and annuity contracts is generally taxable.

Required Minimum Distributions function as annuity-type income and are taxable when received.

Pension income is taxable.

Annuity payments are taxable when income is distributed.

Common Misunderstandings About Annuities and Taxes

A common misunderstanding is that annuities eliminate taxes.

Annuities create income. That income is generally taxable under current rules.

Annuities are transfer-of-risk contracts and are not designed for market growth.

Key Considerations for Annuity Income

Key considerations include:

• Whether income is guaranteed for life
• Whether the income is part of the retirement income floor
• The taxable impact of income received

Bottom Line

Annuities create retirement income through lifetime payments or interest income. Under current rules, that income is generally taxable when received.

FAQ

Are pensions considered annuities?

‍Yes. Pension income is annuity income.

Are Required Minimum Distributions taxable?

‍Yes. Required distributions are generally taxable under current rules.

Are annuities used for market growth?

‍No. Annuities are transfer-of-risk contracts and are not designed for market growth.

Is annuity income part of an income floor?

‍Yes. Annuity income is part of the retirement income floor.