How are withdrawals from non-qualified annuities generally taxed?

Withdrawals from non-qualified annuities are generally taxed on the earnings portion only because of the way these financial products are structured in terms of tax treatment. In a non-qualified annuity, contributions are made with after-tax dollars, meaning the initial investment has already been taxed before it is placed into the annuity. Therefore, when an individual withdraws funds from the annuity, the original contributions can be taken out without incurring any additional tax liabilities.

However, the earnings generated by the investment—interest, dividends, or capital gains—are subject to taxation upon withdrawal. This taxation is typically treated as ordinary income, so it's only when the taxpayer withdraws an amount that includes earnings that they will owe taxes.

As a result, the correct understanding of non-qualified annuity withdrawals is that only the portion that represents earnings is taxable, aligning with the concept of how taxes are applied to different types of funds and investments. This nuanced approach to taxation encourages the use of annuities for long-term savings and investment.