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Suggest you have a look at IRS Pub 575, Pension and Annuity Income. It gets a little complicated... Annuities are qualified or non-qualified, and tax treatment is different. Then there's the question of when she takes money out - before or after the annuity starting date. And how she takes it out - as a big chunk, or in regular periodic payments. If she follows through with the annuity and begins taking regular monthly or quarterly distributions, then (I think!) the taxable part is computed proportionally, much as an IRA with a basis. I don't think there's any question that she'll be paying taxes on the gain only, but when she pays those taxes depends on a lot of factors. Again, see Pub 575. Prepare for your eyes to glaze over.

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