How Do Deferred Annuities Grow? 
A deferred annuity is a contract that accumulates money from two sources . The first source is additional contributions to the annuity . The second source is interest -LRB- except in a variable deferred annuity . -RRB- All of the growth inside a deferred annuity remains untaxed until the money is withdrawn . When the money is withdrawn there are three things to remember , there can be a penalty for early withdrawal , there can be an income tax surcharge for drawing the money out too soon , and then the gain in the contract is most likely going to be taxed as ordinary income . 