Annuity Accrued Interest

For a deferred annuity contract as well as other, interest-bearing investment vehicles, accrued interest is a phrase describing interest that has been earned, but not yet distributed. For annuities, this interest income is tax-deferred until it is received.

headshot of Thomas J. Brock, CFA, CPA
  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Edited By
    Michael Santiago
    Headshot of Michael Santiago, senior editor for

    Michael Santiago

    Senior Financial Editor

    Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.

    Read More
  • Reviewed By
    Stephen Kates, CFP®, Licensed Life Insurance Producer

    Stephen Kates, CFP®, Licensed Life Insurance Producer

    Principal Financial Analyst for

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

    Read More
  • Updated: December 12, 2023
  • 4 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • Deferred annuity contracts consist of an upfront investment (or series of investments), an accumulation period and a distribution period.
  • Accrued interest is amassed during an annuity’s accumulation period. It is the interest your annuity has earned, but not yet distributed.
  • The interest accrued on an annuity is tax-deferred, which means you do not have to pay taxes on it until you receive cash distributions.

Accrued interest is interest that has been earned on a certificate of deposit (CD), bond, annuity or other, interest-bearing investment, but has not been received. This guide focuses on how accrued interest works with deferred annuities. 

Accrued Interest vs. Deferred Interest

With respect to deferred annuities, the terms accrued interest and deferred interest are used interchangeably; however, they are not always used interchangeably for other financial products. It is important to note that both terms describe interest that has been earned, but not yet distributed. Along these lines, deferred annuities are sometimes referred to as deferred interest annuities. 

However, in the context of financing arrangements, the term deferred interest is employed with a different meaning. In this context, deferred interest refers to the deferral of an interest obligation for a specified period. Essentially, it means the borrower will not pay any interest on the loan if he or she pays off the entire debt prior to the end of the deferral period.

Step 1
Step 2
Step 3
Step 4

How soon are you retiring?

Step 1
Step 2
Step 3
Step 4

What is your goal for purchasing an annuity?

Select all that apply

For non-qualified annuities, the accrued interest or growth of a deferred annuity is taxed differently depending on how it is distributed. As an annuitized contract, each payment will be representative of the proportion of growth and principal present at the time of annuitization. Principal will not be taxed, while growth will be taxed as income. When taking withdrawals from an unannuitized contract, the principal is left untouched until all growth has been withdrawn, referred to as Last In First Out (LIFO) withdrawals. 

How Do Interest Earnings Accumulate in a Deferred Annuity?

A deferred annuity contract consists of the following sequence of events:

  1. An upfront investment (or series of investments)
  2. An accumulation period that gives your money time to grow
  3. A distribution period that results in payouts of your interest earnings and principal investment

Interest earnings are amassed during the annuity’s accumulation period. The extent to which the earnings grow depends on the interest rate and crediting method specified in the annuity contract.

The accumulated interest, which is commonly referred to as accrued interest, is your money. You can begin accessing it at your discretion, following a minimum specified accumulation period. Until then, the interest is permitted to grow on a tax-deferred basis, an advantage that can greatly facilitate your ability to save for retirement.

Did you know?

The higher the average annual interest credit and the longer the accumulation period, the more interest you will accrue with a deferred annuity.

When Does Interest Income Accrue for a Flexible Premium Deferred Annuity?

From a funding perspective, there are two types of deferred annuities, a single premium deferred annuity (SPDA) and a flexible premium deferred annuity (FPDA). As implied, the distinction between the two relates to how they are funded. 

An SPDA entails a one-time, lump-sum contribution, while an FPDA allows for periodic contributions, which can vary in amount and frequency. Both vehicles grow on a tax-deferred basis, and both allow the annuitant to determine when to begin receiving penalty-free distributions, following a minimum accumulation period.

Moreover, they accrue interest immediately following a contribution. However, because SPDAs are funded upfront with a lump sum payment and FPDAs are usually funded with a series of smaller payments, interest tends to accrue at a faster rate with the former. This is attributable to the power of compound interest, which is the accumulation of interest on your principal investment and previously earned interest.

Lock In Fixed Annuity Rates as High as 6.9%

Connect with an annuity specialist.

Frequently Asked Questions About Annuity Accrued Interest

Is accrued interest taxable with a deferred annuity?

Accrued interest on a nonqualified annuity — one in which the money you put into it has already been taxed — is not taxed until distributed. When distributions begin, an annuitant will not pay tax on his or her initial investment; however, all earnings are usually taxable.

Is accrued interest a bad thing?

Accrued interest is fundamental for interest-bearing financial instruments, such as certificates of deposits, bonds and annuities. It ensures an equitable arrangement between buyers and sellers, recognizing the timing difference between income earned and income paid. It is not problematic unless the interest payor fails to satisfy its financial obligations.

What are the various types of deferred annuities?

Fundamentally, there are three types of deferred annuities — fixed, indexed and variable. Fixed annuities are the safest of the three, offering a guaranteed rate of interest over a period of time. Indexed annuities are riskier because their returns can fluctuate. Variable annuities are the riskiest of the three as they entail investment positions in volatile financial securities, such as stocks, bonds and money market accounts. 

Does a deferred annuity make sense for me?

A deferred annuity can make sense for some investors, but not everyone. Before buying a fixed, indexed or variable annuity, be sure to thoroughly assess its features and evaluate whether it is a sensible addition to your investment portfolio. Doing so usually entails leveraging a financial advisor. They can help you assess your unique circumstances, evaluate your investment options and establish a formal retirement plan.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: December 12, 2023
Annuity agent on a phone call
Learn About Top Annuity Products Get a Free Annuity Quote from a Licensed Agent
Annuity rates on a screen
Find Today's Best Annuity Rates Compare Today's Best Annuity Rates
Annuities Explained PDF on a tablet
Get Your Annuities Explained PDF Download Your Free Annuities Explained Guide