Will My Annuity Payments be Taxed?
Annuities can be a great way for retirees to receive guaranteed income for life. But you may not be able to keep all the money you receive from an annuity because the IRS may demand a cut. Whether or not your payments are taxable will depend on how you paid for the annuity.
If you use pre-tax money (including money from a traditional IRA or 401(k) that you didn't pay taxes on) to buy an annuity, then the annuity payments are fully taxable as income. For example, say you used some of the money in your 401(k) to buy an annuity that will pay you $2,000 per month. When you prepare your tax return, you'll have to include that $24,000 in annual payments as income and pay taxes on it.
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Source: Fool.com
