Interest credited inside an indexed annuity grows tax-deferred. You do not owe taxes on credited interest until you make withdrawals. When you withdraw, earnings are taxed as ordinary income, not at capital gains rates. Withdrawals before age 59½ may trigger a 10% IRS early-withdrawal penalty on the earnings portion. Indexed annuities held inside a qualified account (IRA, 401k) do not provide additional tax deferral since the account is already tax-advantaged.