How is monthly income taxed for an annuitant who has a 401(k) transfer to an index annuity valued at $200,000?

Monthly income from an annuity, particularly one funded by a tax-deferred account like a 401(k), is treated as ordinary income for tax purposes. When the funds from a 401(k) are transferred into an annuity, the tax-deferred status is maintained, and the income received during the annuitization phase is fully taxable. This means that the individual will pay taxes on the entire amount received as income at their ordinary tax rates in the year that they are distributed.

This treatment is designed to ensure that tax liabilities are incurred when individuals actually receive income, rather than when the money is initially transferred into the annuity. Other options imply a percentage of tax-free treatment or a deferral of tax consequences, which do not apply to the scenario of annuity payments stemming from a 401(k) transfer. These inaccurate interpretations could lead to misunderstandings regarding tax obligations associated with annuity income.