How Are Variable Annuities Taxed? 
Variable Annuities are taxed just the same as a traditional Fixed Annuity . If the Annuity is not in an IRA or other Qualified Plan , then any withdrawal is subject to capitol gains tax , both Federal and State . This is just on the `` Gains '' of the policy . If the Annuity is in an IRA or Qualified Retirement Plan , then withdrawals are taxed as Income . It is also important to note that any withdrawal before age 59 1/2 , is subject to a 10 % tax penalty . This is for IRA & non IRA Annuities . If the Annuity is a Variable Immediate Annuity , which pays an income stream to you , then things are a bit different . If it is an IRA then all income payments are taxed as Income . If it is not an IRA , then it is taxed under the exclusion ration . This `` excludes '' a certain percentage of the income from taxes , since it is considered basis -LRB- principle -RRB- . 