Tax-deferred does not mean tax-free
Earnings inside an annuity generally are not taxed until they are distributed. When taxable earnings are distributed, they are generally treated as ordinary income rather than capital gains.
Qualified and nonqualified money differ
An annuity held inside an IRA or qualified retirement plan sits inside an account that already has tax rules. Buying an annuity there does not create an extra layer of tax deferral. A nonqualified annuity is generally purchased with after-tax dollars.
Nonqualified withdrawals often take earnings first
For many nonqualified annuities purchased after August 13, 1982, a withdrawal before the annuity starting date is generally allocated first to taxable earnings and then to the owner's cost basis. Exceptions and special rules can apply.
Age can matter
A taxable distribution before age 59½ may be subject to an additional federal tax unless an exception applies. Contract charges are separate from tax penalties.
Income payments use additional rules
When a contract is annuitized, each payment may include taxable income and a return of cost basis under federal calculation rules. The treatment depends on the contract and how it is funded.
This is general education, not tax advice. A licensed professional can explain the contract mechanics, and a qualified tax professional should confirm how the rules apply to your circumstances.