A variable annuity offers a broad spectrum of investment options to accommodate your particular investment strategy. The value of your investment will vary depending on the performance of the particular options you choose. Variable annuities are typically mutual funds that invest in stocks, bonds, and money market instruments or combination thereof.
Variable annuities differ from mutual funds in three distinct ways: One, you receive periodic payments, ensuring you will not outlive your benefit. Two, variable annuities carry a death benefit. And three, they are tax deferred.
Periodic payments ensure you will continue to receive income after you retire without exhausting or outliving your benefit. The death benefits associated with variable annuities guarantee your beneficiary to receive a specified amount, typically, at least the amount of your purchase payment(s). Your beneficiary will receive a benefit from this feature provided that at the time of your death, your account is valued less than the guaranteed amount. Variable annuities are also tax deferred, meaning, you pay no taxes on the income or investment gains until you withdraw your money.
With variable annuities you also have the ability of transferring your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. It is important to note that when you take your money out of a variable annuity, you will be taxed on the earnings at regular or ordinary tax rates rather than the lower capital gains rates.
In general, the benefits of tax deferral will only outweigh the costs of a variable annuity if you hold it as a long term investment. Variable annuities are not suitable as short term investments as substantial taxes and company taxes may apply as penalties for early withdrawal.
As with any investment, you should consult with your tax professional regarding the potential risks and benefits associated with variable annuities and ask lots of questions to find out if a variable annuity is right for you.