Variable Annuities

No doubt you’re looking forward to retiring—less stress and more time to do the things you love. If you want to leave the daily grind behind, but not worry about not having a paycheck, a variable annuity may help.

The Details

Let’s break down variable annuities so they’re easy to understand.

Essentially, you’re setting up an annuity contract  that you want to contribute money to and later receive payments or take withdrawals from. Annuity payments can typically either be set up to last for a set period of time or you can select the option of having the income guaranteed for life.

Within that one account, you can have several types of investments (stocks, bonds, and money market instruments). Each different type of underlying investment is put into a “subaccount.”

When you contribute, you choose how much of your money gets invested in each type of subaccount. You’ll earn money based how well each type of subaccount performs. You can move money around within the variable annuity’s subaccounts.

You have the option to receive regular payments from the annuity based on how much it’s worth and how long you select for the payments to last.

Why They May Be a Good Idea

A variable annuity might make sense if you still want higher growth potential, but you also want the option to have the steady income to rely on. (But your return isn’t guaranteed, and there is a risk of losing money you invested initially.)

• You can invest money on a regular basis, which can help even out the highs and lows of the market’s performance.
• Some variable annuities offer options that could lock in the account value. (Restrictions and costs may apply.)
• You won’t pay tax on the money your annuity earns until you withdraw it.

An annuity may also help make things easier for your spouse or children if you die. An annuity doesn’t have to go through probate, so your beneficiaries can access it without having to wait.

If you had not started to receive annuity payments (“annuitize”), your beneficiary will get a “death benefit” that usually equals the total value of the annuity, minus any withdrawals. If you had already started to receive payments, the remaining guaranteed payments typically will go directly to your beneficiary.

Facts to Consider

A variable annuity could be just what you’re looking for if:

• You want your money to have more potential for growth.
• You’re concerned about outliving your money.
• You’re changing jobs or retiring.
• You want your beneficiaries to have quicker access to your money.

Common Questions

Why is tax-deferral important?
Tax-deferral means you won’t pay taxes on the money earned by your annuity until you start getting payments. If you’re in a lower income-tax bracket when you start getting payments from your annuity, you’ll pay less marginal income tax on the money you earn.

Distributions taken prior to annuitization are generally considered to come from the gain in the contract first. If the contract is tax-qualified, generally all withdrawals are treated as distributions of gain. Withdrawals of gain are taxed as ordinary income and, if taken prior to age 59 ½, may be subject to an additional 10% federal tax penalty.

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