Payments from the annuity represent both principal and earnings. Only your earnings are taxable until all principal is recaptured. After that, income you receive is fully taxable. Variable Annuities let you participate in the potential growth or income of a portfolio of securities. The earnings and capital gains generated are not taxable until your money is returned to you.
Most variable annuities have accounts tied to stocks, bonds and money market securities.
You can select the proportion of your investment assets to be dedicated to each class. As your investment objectives change, you can alter your asset allocation with no charge and no tax consequences. Some variable annuities also feature an automatic asset allocation feature. The annuity's fund managers will reallocate your assets among different investment classes as economic factors or major market trends dictate. Many variable annuities also have a fixed subaccount offering principal and interest guarantees from the issuing insurance company.