Growth inside a fixed annuity is tax-deferred — you do not owe taxes on credited interest until you make withdrawals. When you do withdraw, earnings are taxed as ordinary income, not at capital gains rates. If you withdraw before age 59½, the IRS may assess a 10% early-withdrawal penalty on the earnings portion. Annuities held inside qualified retirement accounts (IRA, 401k) do not provide an additional tax deferral benefit.