Explain briefly how annuity distributions are taxed

What will be an ideal response?

When distributions occur out of an annuity contract the payment is split into principal and interest by an exclusion ratio. This assumes that the deposits were made with after tax dollars. Interest is taxable, principal is not. The exclusion ratio applies until the basis in the contract is recovered. With withdrawals made before 59 there is a 10% penalty unless the distribution is taken as an annuity.