How are interest earnings treated during the accumulation period of an annuity?

During the accumulation period of an annuity, interest earnings are retained in the contract on a tax-deferred basis. This means that the earnings from the annuity do not incur taxes while they remain in the account, allowing the investment to grow without the immediate tax burden. This characteristic is a significant benefit of annuities, as it permits the investor to accumulate a larger sum over time, with taxes only being assessed when distributions are taken.

This tax-deferral feature encourages individuals to invest in annuities for long-term planning, such as retirement, as it allows them to maximize their savings and compound growth without the erosion of taxes in the interim. When funds are eventually withdrawn from the annuity, that is when tax implications arise based on the amount that is taken out and the individual's tax situation at that time.