Taxation on Annuity held Inside IRA

A client holds a variable annuity with a lifetime income rider inside an IRA. Earlier this year the client began taking annual allowable withdrawals from the annuity. However, the withdrawn funds have remained inside the IRA (either reinvested or holding in cash). Obviously payments from a qualified annuity are reportable as taxable income. However, in this case, given the funds are remaining inside the IRA – is there no tax-effect of these withdrawals until such a time as the funds are actually pulled out of the IRA?



Correct, taxable income will not be reported until there is a distribution from the IRA, and taxes then follow the IRA rules, not the rules for NQ annuities. However, if client is subject to RMDs, the distribution must be made from this IRA or other IRA client may own. 



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