What Are the Two Phases of Annuity?

Q. What are the two phases of an annuity?

A. An annuity typically has two phases –

• Accumulation phase
  
• Distribution phase

During the Accumulation phase, the owner contributes and invests funds to accumulate assets, earnings are tax deferred.

During the Distribution phase, the lifetime income stream starts, this protects the annuitant from the risk of running out of money in case of living too long.  The payment has two components – the earning part (will be taxed as income) and the return of principal part (no tax impact).