What happens to earnings in an annuity while the owner is not making withdrawals?

In an annuity, earnings accumulate on a tax-deferred basis while the owner is not making withdrawals. This means that as the annuity's value grows over time due to interest or investment returns, the owner does not have to pay taxes on those earnings until they are withdrawn. This tax-deferred growth can significantly enhance the overall benefits of an annuity as it allows the investment to potentially grow more quickly than it would in a taxable account, where earnings would be taxed annually.

During the accumulation phase, the owner can focus on building their retirement savings without the immediate tax burden, effectively allowing their investment to compound. This feature is one of the reasons individuals often choose annuities as a retirement savings vehicle.

The other options do not accurately reflect how annuities operate. Some might imply that earnings are penalized or diminished rather than allowed to grow tax-deferred, while others may suggest a static growth based on initial investments, which does not take into consideration the potential for returns or interest over time.