Well eventually youâ€™d have to pay tax on earnings. Even if you kept rolling over the annuity into another fixed annuity (tax-free 1035 exchange) eventually youâ€™d run out of principal to withdraw. But if it is assumed that withdrawals are always interest first, then if you withdraw money equivalent to how much you earn in interest, youâ€™re basically back to a CD-like situation where earnings are entirely taxed annually.

Unless you split your total fixed annuity investment into smaller ones maybe. Hereâ€™s a thought experiment, let me know if thatâ€™d work:

Say you invested $100k into 4% annuities and wanted that to form an income stream ($4k annual withdrawal). If you made a single annuity, each year your $4k withdrawal would be 100% interest so fully taxed. But if you made 2 separate fixed annuities of $50k each, and annually withdrew $4k from only one of them (instead of $2k from each), wouldnâ€™t you save on taxes? Itâ€™d seem to me that because out of this $4k withdrawal, $2k would be interest and $2k would have to be principal, youâ€™d only be taxed on $2k interest. Meanwhile, the other $2k in the other annuity would keep compounding interest untaxed. Rinse and repeat each year where youâ€™d keep withdrawing from the same annuity as before (which will start generating even less interest due to lower balance).