Obviously, one of the most attractive features of annuities is the tax-deferred growth that occurs during the accumulation phase. It should be noted, however, that when money is withdrawn or distributed without annuitizing, all or a portion would be taxed at ordinary income tax rates. This will be the case if you make systematic or periodic withdrawals.

On the other hand, if you annuitize, only the portion of the money distributed that relates to earnings, as opposed to principal, will be taxable. In this instance, a portion of your income will be considered a "return of principal" and would not be taxable.

Note that withdrawals from qualified annuities (Individual Retirement Annuities or those within a qualified retirement plan available through an employer) are taxed, based on qualified plan rules that are generally less favorable than for "non-qualified" annuities.