When Are Annuities Taxable? 
Annuities are always taxable when gain is withdrawn from the annuity unless the annuity is placed inside a Roth account . Annuities do defer taxes when no money is removed from the annuity , so if no withdrawal , the gain is not realized until it is withdrawn from the annuity . Annuities use the Last in Last out -LRB- LIFO -RRB- accounting rule , which means gain in the annuity must be withdrawn before basis is removed , unless the annuity is annuitized . For annuities with a cost basis -LRB- i.e. non tax deducted/qualified -RRB- annuitization uses a tax rule known as the exclusion ratio to make part of the income stream gain and part non-taxable basis . 