One of the benefits of annuities is that they are tax-deferred. However, tax-deferred means exactly what it says: you don¿t have to pay taxes immediately, but you will pay them eventually.
In order to explain how taxes work with annuities, you must look at annuities as consisting of two parts. The first part is where you put money into the account, either in one lump sum or in installment payments, and allow interest to accumulate. You will not have to pay any taxes on any money you have put into the account.
The second part is when you start receiving payments from the insurance company after your money has accumulated interest over the years. When you start receiving payments, a certain percentage of those payments will be taxed.
The amount that you will be taxed will based on the difference between the amount you put in and the amount you have earned that you can take out of the account. For example, say that you put $10,000 into the account to begin with, and after a period of years it accumulated to around $25,000. You would be taxed on the $15,000 you earned in that time period.
This may depend on what you choose to do with the money you are getting from your annuities. If you are planning on passing this money on to family members of friends after you have passed on, you may want to consult an attorney who specializes in estate planning. Your estate planning lawyer will be able to further advise of the tax repercussions of annuities and the many other options you can choose to pass on money to beneficiaries.