Is Annuity Income Taxed? 
Yes , annuity income is taxed . The growth inside the annuity is tax deferred during the accumulation phase , but when you start the annuitization or distribution phase , where you start collecting payments , you will need to start paying income taxes on them . If you receive the payment as a lump sum , you will pay taxes on the difference between what you paid in and what you were paid . Not only can annuities be a good source of retirement income , but most people are in a lower tax bracket when they retire , so that the taxes do not sting as much . 