One of the most common misconceptions regarding annuities is the tax benefits. Agents will often entice potential buyers by citing the tax deferred status of annuity gains and income. The truth of matter is there is no tax benefit. In fact, there is a tax disadvantage. Annuities are taxed on a LIFO (last in first out) basis. That is, when it comes time to make withdrawals, your gains are pulled out first. These gains are taxed as ordinary income. If you invested in a stock or mutual fund, your gain, assuming your holding period was longer than one year, would be taxed at long term gain rates of 5 or 15% depending on your adjusted gross income. Currently, this long term rate is lower than your personal tax rate. So basically, annuities will shift gains from long term rates to ordinary rates. This is a tax increase. Yes, the tax is deferred but you will pay a higher rate. Do not be misled about the tax treatment of annuities.