Definition:

Annuities are a type of tax-deferred retirement plan. Unlike 401(k)-plans, annuities are funded using income that has already been taxed. Tax on any interest, capital gains, and other earnings of your annuity contributions, is deferred until you start withdrawing from your plan. Your annuity payments must be divided between your contributions and earnings on those contributions ? and you are taxed only on the earnings and not on your original contribution.


You calculate the taxable portion of your annuity using the Simplified Method Worksheet in the instruction booklet for Form 1040 (PDF), page 23. Your total annuity payments are reported on Form 1040, line 16a, and the taxable portion is reported on line 16b.