A variable annuity is an insurance contact, under which the insurer agrees to make periodic payments to you in the future. You can purchase an annuity contract by making either one single purchase payment or a series of purchase payments to the insurer.
The Advantages of Variable Annuities
Variable annuities offer a unique combination of insurance and investment benefits: choice and flexibility. tax deferral. the opportunity for guaranteed lifetime income.
Advantages and disadvantages of annuities
A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout.
A variable annuity starts with you making payments to an insurance company and choosing funds to invest your money in. ... Because of the volatility any investment can experience, the value of your account can rise and fall with the market. You may lose money, but you might also earn quite a bit.
Annuity distributions are taxed as ordinary income, which is a higher rate than that for the capital gains you get from other retirement accounts. Annuities charge a hefty 10% early withdrawal fee if you take money out before age 59½.
You should not buy an annuity if Social Security or pension benefits cover all of your regular expenses, you're in below average health, or you are seeking high risk in your investments.
Why Are Variable Annuities Generally Poor Investment Options? The first reason is cost. According to Vanguard, the industry average annual cost of a variable annuity is 2.24% of the assets of the fund. You can buy a diversified portfolio of low cost index mutual funds for approximately .
Variable annuities could help you meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals. Substantial taxes and surrender charges may apply if you withdraw your money early. Variable annuities involve investment risks just like mutual funds do.
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