What is the main tax impact associated with a non-qualified annuity's withdrawals?

The main tax impact associated with withdrawals from a non-qualified annuity involves taxation on the earnings above the contributions. In this context, non-qualified annuities are funded with after-tax dollars, meaning that the original contributions have already been taxed. When a withdrawal is made, the IRS considers the money taken out in two parts: the portion that represents the original contributions, which is not taxable, and the earnings, which are subject to income tax.

When an individual withdraws funds from a non-qualified annuity, they will pay taxes only on earnings or growth above their contributions. This approach ensures that the investor does not pay taxes again on money that has already been taxed before being invested. Thus, the correct understanding of the tax implications of withdrawing from a non-qualified annuity accurately reflects that only the earnings portion of the withdrawal is taxable.