How should a SPIA be taxed?

A Single Premium Indexed Annuity (SPIA) are taxed in the same manner as other annuities.  Annuities are taxed at the time of withdrawal, regardless of the type of annuity purchased.  The amount of taxation varies depending on whether you purchased an annuity with pre-tax or after-tax dollars.   If you funded your SPIA with pre-tax money (i.e. money from an IRA, 401(K), or other qualified money) you have a qualified annuity and you will pay taxes on the full withdrawal amount.  If your annuity was funded with after tax money, you have a non-qualified annuity and you will only pay income taxes on the earnings portion of of your withdrawals.  Another component to the taxation of a non-qualified annuity depends upon whether the annuity has been "annuitized".  Annuitization is the one-time event of converting the funds in your annuity contract into a stream of income payments either for a set term or for life. Payments from an annuitized contract have a principal component and an earnings component.  If the annuity contract has not been annuitized, then withdrawals are taxed on a last-in-first-out (LIFO) tax rules. This means that any withdrawal amounts are taxed first as the annuity’s growth element and are subject to ordinary income tax. Once the amount withdrawn exceeds the increase in the value that the annuity has gained, all subsequent withdrawal amounts are considered a tax-free return of your principal and you won’t owe taxes on that amount.  In general, withdrawals from your annuity before you turn 59 ½, may result in a 10% penalty on the taxable portion of the withdrawal.