What is the treatment of non-qualified annuity payments?

The treatment of non-qualified annuity payments is indeed best described as "mixed," which indicates that the tax treatment involves different methods for different portions of the payout. In the case of non-qualified annuities, the return of the principal (the contributions made into the annuity) is not taxed when paid out to the annuitant, while any earnings (interest or investment returns) are taxed as ordinary income upon distribution.

A non-qualified annuity can be understood using a "mixed" approach because it combines both tax-free return of capital (the principal) and taxable income (the earnings). When an annuitant receives payments, the initial portion of each payment is considered a return of principal, which is not taxed, while subsequent portions that represent earnings are subject to taxes.

In contrast to a pure LIFO (Last In, First Out) or FIFO (First In, First Out) method, which would assign a specific order in which funds are considered to be withdrawn or distributed, the mixed approach is more nuanced and accurately reflects the taxation reality for annuities. Thus, "mixed" effectively summarizes how these payments are treated in terms of tax implications.