An immediate annuity is one that begins to pay out immediately after it is set up. At retirement, annuities offer you a variety of payout options to meet your needs. Annuities and Income Tax Earnings in an annuity, unlike most financial products, are not currently taxable as income. Earnings are tax-deferred until you actually withdraw your money. This means the money you would have used to pay taxes can remain in the annuity earning more interest.
Tax advantages can occur at payout, too.
Non-qualified annuities use an IRS exclusion ratio that determines the taxable and nontaxable portions of the income payments. Essentially, you only pay taxes on the portion of payout that represents income earned on the annuity. That's because contributions you made to the annuity have already been taxed when they were earned. Qualified annuities provided by a pension, profit sharing plan, deductible. Traditional IRA or SEP are purchased with funds that are not subject to income tax at the time they are earned.