What it sounds like
The payments will not appear in taxable income and no part of a withdrawal will be taxed.
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Annuity Pitch Decoder
Decode “This creates tax-free income.”
Decode common annuity sales claims without handing over your email or phone number. The answer comes from reviewed rules and primary evidence—not a salesperson and not an improvised AI response.
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Decoded · Tax claim
“This creates tax-free income.”
Tax-deferred growth, tax-free return of basis, a tax-free exchange, and tax-free income are different claims with different requirements.
What it may actually mean
- Growth may be tax-deferred until money is distributed.
- Part of a nonqualified annuity payment may be treated as a return of after-tax cost under applicable tax rules.
- A properly executed Section 1035 exchange may defer recognition at the time of exchange; later distributions can still be taxable.
This claim does not prove
- That earnings distributed from a nonqualified annuity are tax-free.
- That payments from a qualified retirement account are tax-free.
- That an early distribution avoids an additional federal tax.
- That state tax treatment matches federal treatment.
What the paperwork must show
- Whether the premium comes from qualified or nonqualified money
- The owner’s documented investment in the contract or tax basis
- Whether the transaction is a withdrawal, annuitization, or direct exchange
- Expected Form 1099-R treatment and distribution code
- A tax professional’s analysis for the owner’s facts and state
Take these into the meeting
Questions the sales pitch should survive
- 1Which part is expected to be tax-free: principal, earnings, or the entire payment?
- 2Is this tax deferral, basis recovery, Roth treatment, or a Section 1035 exchange?
- 3What tax form and distribution code should I expect?
- 4What fact would make the tax treatment different from the illustration?
Evidence behind this explanation
Open the primary sources
Editorially reviewed 2026-08-15
Internal Revenue Service
Publication 575 — Pension and Annuity Income
Explains taxable and tax-free portions of pension and annuity payments and the ordering treatment for certain withdrawals.
Internal Revenue Service
Topic No. 410 — Pensions and Annuities
Explains when pension or annuity payments can be fully or partly taxable and points taxpayers to the applicable calculation methods.
These sources explain the issue category. Only the issued contract, rider, data pages, illustration, and applicable law establish the terms of a specific offer.
Need the actual offer checked?
Bring the contract—not another sales pitch.
The decoder identifies what must be proven. The Annuity Second Opinion compares the offer and its documented terms.
Educational information only—not individualized investment, insurance, legal, or tax advice. A claim can be accurate for one contract and misleading for another. Review the issued contract and consult appropriately licensed professionals for your circumstances.
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