Some or all of your withdrawals could be taxed, depending on how you made your initial investment and how you’re pulling money out. Getty Images By Kimberly Lankford, Contributing Editor July 25, 2017 QI invested $150,000 in a variable annuity about 15 years ago and haven’t taken any withdrawals yet. Now that I’m in my late sixties, I’d like to start tapping the account, which is now worth about $210,000. How will the withdrawals be taxed?SEE ALSO: 11 Smart Moves to Make Your Money Last in Retirement AVariable annuities aren’t taxed until you withdraw the money. The amount that will be taxed depends on the way you made your initial investment and the way you take withdrawals. If all of the money you invested was pretax or tax-deductible (for example, if you bought the annuity within a 401(k) or traditional IRA), all of your withdrawals will be subject to income taxes. But if you invested using after-tax dollars, the earnings will be taxed as income, and the rest will be a tax-free return of principal. However, the way your earnings and principal are calculated depends on how you take the withdrawals. Say you cash in the entire annuity for a lump sum. You’ll have to pay income taxes on all of the earnings in one year – in your case, $60,000 of the $210,000. But if you withdraw some of the money and keep the rest growing in the account, your first withdrawals will be considered taxable earnings. Once you’ve pulled out all of the earnings, any further withdrawals will be considered a tax-free return of principal. Your insurer will calculate the portion of principal and earnings for each withdrawal. Advertisement SEE ALSO: Are Annuities Right for You? The way taxes are figured is different if you convert the annuity into an income stream (called annuitizing). In that case, withdrawals are a combination of earnings and return of principal, and your principal is returned in equal installments over the payout period. If you have the payments continue for as long as you live (a life annuity), for example, the principal is paid out according to the IRS’s life-expectancy figure for someone your age. You’ll owe income taxes on any portion of each payout beyond the return of principal. Your insurer will be able to tell you the amount of each payout that is not subject to income taxes. People who withdraw any money from an annuity before age 59½ usually have to pay a 10% early-withdrawal penalty on the taxable portion of the withdrawal, too. That won’t apply to you because you’ve passed that age. SEE ALSO: What to Ask Before Buying an Annuity Got a question? Ask Kim at firstname.lastname@example.org.