Annuity earnings are tax-deferred during the accumulation phase, which means that the policy holder does not pay taxes on any earnings until they withdraw. The policy holder pays taxes on earnings only when they withdraw money. Any earnings payouts are taxed as regular ordinary income. The earnings payouts may be subject to a 10% withdrawal penalty if they are made before age 59 and 1/2, in addition to applicable income taxes. If it is held outside an IRA or qualified retirement plan, a variable annuity does not require a minimum withdrawal at age 70 and 1/2.