It depends on whether the annuity is in a taxable account or an IRA, as well as how you choose to take the withdrawals. By Kimberly Lankford, Contributing Editor March 30, 2016 I contributed $100,000 to an annuity in 2007, and the account grew to $143,000. I recently withdrew $120,000 to buy a new house. How much of the withdrawal is taxable?See Also: Are Annuities Right for You? It depends on whether the annuity is in a taxable account or an IRA. If the annuity is in a taxable account, the first withdrawals are considered to be from earnings – which are taxed in your top income tax bracket – and any remaining withdrawals are considered a tax-free return of your principal. In your case, the first $43,000 of withdrawals is considered to be from taxable earnings, and the remaining $77,000 is a tax-free return of principal. (If you withdraw money before age 59½, you will also have to pay a 10% early-withdrawal penalty on the earnings portion of the withdrawal.) If you end up withdrawing more money later, after the account has grown more, the earnings portion will be recalculated. “The calculation is done each time a withdrawal occurs, based on gains at the time,” says Michael Kitces, a certified financial planner and director of wealth management for the Pinnacle Advisory Group in Columbia, Md. Advertisement If the annuity is in a traditional IRA and all of your contributions were tax-deductible, the entire withdrawal will be taxed at your top income tax rate, and it will be subject to the 10% early-withdrawal penalty if you’re younger than 59½. When making decisions about annuity withdrawals from a taxable account, keep in mind that the way you take the money can affect the tax situation. If you had annuitized the account -– converted it to an income stream with payments spread either over your lifetime or over a certain number of years, rather than taking withdrawals whenever you’d like – then a portion of each payout is considered to be a tax-free return of principal and a portion is considered to be earnings, based on the length of time the payouts are scheduled to continue. For example, if you have a life annuity with payouts that stop when you die, the payout period is the IRS’s life-expectancy number for someone your age. Divide your contributions by that life-expectancy number to determine how much of each payout is a tax-free return of principal; you’ll be taxed only on the portion of each payout above that amount. Your annuity administrator can help with the calculations. See Also: 12 Ways to Go Broke in Retirement Got a question? Ask Kim at firstname.lastname@example.org.