Fixed Annuities

Tax-deferred is not the same as "tax-free." Tax-free investments, such as most municipal bonds, incur no income taxes on gains. Annuities are taxed on their gains, but only when you choose to withdraw those gains from the annuity.

The money inside your annuity is made up of two components -- principal and earnings. Assuming your annuity was opened with after-tax dollars, you're only taxed on your earnings.

Annuities are not perfect when it comes to tax control. If you should pass away while your annuity is accumulating, all deferred taxes on your growth will become due, reducing your annuity's value.