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How are fixed indexed annuities taxed?

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Short answer: A fixed indexed annuity grows tax-deferred, so you don't pay income tax on credited interest until you take money out. Withdrawn earnings are taxed as ordinary income, not capital gains, and withdrawals before age 59½ may add a 10% federal penalty. Inside a traditional IRA, withdrawals are generally fully taxable. Not tax advice.

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Tax-deferred, not tax-free

Interest credited to a fixed indexed annuity (FIA) isn't taxed each year. The NAIC Buyer's Guide is clear that this isn't the same as tax-free: you'll pay ordinary income tax when you take a withdrawal, receive an income stream or receive annuity payments. FINRA's annuities page adds that gains are taxed at ordinary income rates, and withdrawals before age 59½ may face a 10% tax penalty.

Non-qualified FIAs (bought with after-tax money)

If you bought the FIA with money that was already taxed, only the earnings are taxable. IRS Publication 575 says withdrawals before your annuity starting date are allocated first to earnings (the taxable part) and then to your cost (the tax-free part).

Example: you put in $100,000 and the account grows to $130,000. You withdraw $20,000. Because earnings come out first, all $20,000 is taxable as ordinary income. Once you've taken out the $30,000 of earnings, further withdrawals are a tax-free return of your $100,000.

If you turn the contract into lifetime income (annuitize), each payment is generally part taxable earnings and part tax-free return of what you paid in. Publication 575 also notes that nonqualified annuity income is included in figuring the 3.8% net investment income tax, which can apply at higher incomes.

Qualified FIAs (inside an IRA)

Think of the IRA as the box and the FIA as what's inside it. When an FIA sits in a traditional IRA, the IRA's rules apply, and withdrawals are generally fully taxable, not just the gains. In a Roth IRA, qualified withdrawals are tax-free. FINRA notes an annuity inside an IRA or 401(k) gives no additional tax advantage, so the reason to hold one there should be the floor or the income, not taxes.

Required minimum distributions apply too. The IRS RMD FAQs say you generally must start taking withdrawals from a traditional IRA at age 73, or 75 if you were born in 1960 or later, under the final RMD regulations. Ask whether RMDs can come out of your contract without a surrender charge.

When you die

The NAIC says survivors typically owe income tax on any death benefit they receive from an annuity. Annuities generally don't get a step-up in basis, so the gain is taxed as ordinary income to the beneficiary. See what happens to an FIA when you die.

Moving to another annuity

Publication 575 says no gain or loss is recognized when you exchange one annuity contract for another if the annuitant stays the same. This is often called a 1035 exchange. A new contract usually starts a new surrender period, so taxes aren't the only thing to compare.

How it compares with a CD

CD interest is generally taxable each year, according to IRS Topic 403. An FIA defers tax on credited interest until you take it out. A MYGA works like an FIA here. Not tax advice.

Questions worth asking

Plain-English FAQ

Are fixed indexed annuity gains taxed as capital gains?

No. Gains are taxed as ordinary income when you take them out, not at capital gains rates.

Do I pay tax on my FIA every year?

Generally no, if an individual owns it. Credited interest is tax-deferred until you withdraw it, take income or a death benefit is paid. It's tax-deferred, not tax-free.

Do FIAs inside an IRA have required minimum distributions?

Yes. The IRA's RMD rules apply. The IRS says you generally must start taking withdrawals from a traditional IRA at age 73, or 75 if you were born in 1960 or later.

Can I move my FIA to another annuity without paying tax?

Generally yes, through a direct annuity-for-annuity exchange, if the annuitant stays the same. A new contract usually starts a new surrender period, so compare carefully.

Ready for your number?

Every contract has its own caps, fees and surrender schedule, so the general rules on this page only go so far. You can get a free one-minute income quote at quote.garycosby.com, and if you choose, talk with one of our licensed agents about how a specific contract works. It's your money and your decision.

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More guides

Sources

  1. NAIC, "Buyer's Guide for Deferred Annuities" (2022 edition; checked October 23, 2026). https://content.naic.org/sites/default/files/publication-anb-lp-consumer-annuities-fixed.pdf
  2. FINRA, "Annuities" investor page (page date not shown; checked October 23, 2026). https://www.finra.org/investors/investing/investment-products/annuities
  3. IRS, Publication 575 (2025), Pension and Annuity Income (last reviewed April 30, 2026; checked October 23, 2026). https://www.irs.gov/publications/p575
  4. IRS, "Retirement plan and IRA required minimum distributions FAQs" (last reviewed January 29, 2026; checked October 23, 2026). https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
  5. ThinkAdvisor Tax Facts, Q 591, taxation of amounts payable at an annuitant's death before annuitization (updated October 20, 2026; checked October 23, 2026). https://www.thinkadvisor.com/tax-facts/2024/03/13/591-if-an-annuitant-dies-before-a-deferred-annuity-matures-or-is-annuitized-is-the-amount-payable-at-the-annuitants-death-subject-to-income-tax/
  6. Federal Register, "Required Minimum Distributions" final regulations, 89 FR 58886 (July 19, 2024; checked October 23, 2026). https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
  7. IRS, "About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc." (last reviewed October 16, 2026; checked October 23, 2026). https://www.irs.gov/forms-pubs/about-form-1099-r
  8. IRS, "Topic no. 403, Interest received" (last reviewed October 7, 2026; checked October 23, 2026). https://www.irs.gov/taxtopics/tc403
  9. IRS, "Roth IRAs" (last reviewed August 9, 2026; checked October 23, 2026). https://www.irs.gov/retirement-plans/roth-iras
  10. IRS, "Net Investment Income Tax" (last reviewed July 1, 2026; checked October 23, 2026). https://www.irs.gov/individuals/net-investment-income-tax

All figures on this page come from the dated sources above. Dollar amounts and percentages labeled Example are illustrations, not rates, quotes or predictions.