Generally speaking variable annuities are very complex sophisticated financial instruments and purchasers of these type products should be conversant with and understand the terms, conditions, tax consequences and other implications of owning annuities in their investment portfolios.
Once invested within a Variable Annuity (within retirement plans, or not) growth of capital, dividends and interests are all tax deferred.
Investments into Variable Annuities can be either a tax deductible or non-tax deductible contribution depending if it's within a retirement plan or not.
Withdrawals made from a Variable Annuity are generally a taxable distribution, and taxed at your then current income tax rate.
Most Variable Annuities have minimum initial investments of $250 with additional investments permitted as low as $25.
Variable Annuities can be used for tax deferred long term Individual and family investment and gifting accounts, for various Charitable Trust Accounts, and for investments inside of retirement vehicles such as IRA's, IRA SIMPLE, SEP-IRA's, SAR-SEP IRA's, 401K Plans, Simple 401Ks, Age Weighted Profit Sharing Plans, Defined Benefit Plans, Profit Sharing Plans, 403B Plans, Money Purchase Plans, 401K Rollovers, 403B Rollovers, etc.
Most Variable Annuities offer contract owners daily account valuations via toll free access and or automatic telephone computerized pricing. Performance figures are typically sent quarterly to contract owners and most of the major variable annuity contract valuations are available on the annuity companys website.
Some Variable Annuities offer investors a full range of different asset class investment categories to accommodate different interests, different investment objectives, different risk levels, and different volatility levels. Virtually all the major investment asset (Stock, Bonds) classes ranging from conservative to aggressive are available within no-Load variable annuities, including: Fixed Rate Accounts, Money Market Accounts, Utility Stock Accounts, US Government Bond Accounts, High Quality Bond Accounts, Foreign Bond Accounts, High Yield Bond Accounts, Strategic Bond Accounts, Blend Accounts, Balance Accounts, Stock Index Accounts, Growth and Income Accounts, Large Capitalization Stock Accounts, Mid Capitalization Stock Accounts, Small Capitalization Stock Accounts, Foreign & International Stock Accounts, Natural Resource and Precious Metal Stock Accounts, REIT Accounts, etc.
Variable Annuities have a minimum death benefit (up to a certain age- generally up to age 80 to 90) to heirs equal to the initial investment less any withdrawals. If at death, and if the market value of the Variable Annuity is greater than the initial investment then the death benefit is the market value.
Variable Annuities have a named beneficiary. Consequently they avoid probate expense, and the asset passes directly to the named beneficiary. The beneficiaries must still pay taxes on the gains in the account.
Estate Tax Considerations of Variable Annuities (Income in Respect of Decedent IRD): If the beneficiary of a deceased owner/annuitant is the spouse, then the spouse has the same rights as the original owner. If the beneficiary is not a spouse then the beneficiary must take distributions from the annuity within five years or he/she can annuitize the contract over his/her life expectancy. The gain within the annuity on non-spouse distributions is taxable as ordinary income; however, the beneficiary receives an itemized deduction equal to estate taxes paid to offset against this gain. (Check with your tax professional.)
Growth of capital, interest income and dividend income within Variable Annuities are all tax deferred until withdrawal. Consequently, within annuities one can switch between investment subsets without any tax consequences, and one can control the disbursements as he or she deems appropriate. Once funds are removed from the annuity and if those funds have a gain in value then they are taxable as ordinary income. All gains must be withdrawn first before any principal.
Monies withdrawn from a Variable Annuity prior to age 59 1/2 might be subject to 10% tax penalty, just like withdrawals under similar circumstances from a retirement plan.
Some Variable Annuities allow unlimited switching between investment sub-accounts at no cost. Others allow 12 or more per year, after which some have a small charge, usually $10.
Some Variable Annuities allow you to place monies into money market accounts, limited term bond accounts or fixed rate accounts and periodically and systematically take the earned interest from these accounts and invest into other investment choices within the investment sub-accounts.
Some Variable Annuities offer a program that realigns a mix of funds to match previously selected investment allocations. The rebalancing feature, if elected, will adjust the fund profile on a quarterly, semi-annually or annual basis to reflect the original mix.
Some Variable Annuities offer a program where the investment is split between the fixed account and the variable account. At the end of the term selected the fixed account grows to the original investment. The variable component of the investment will they reflect the growth of the account.
Variable annuities are offered without any sales charges on the initial investment and they generally offer owners the option to withdraw a part of their accounts, at any time, for any reason, without any deferred sales charges. Typically, most variable annuities have a declining deferred sales charge for withdrawals made over a certain amount, and this declining deferred sale charge can be as long as 7 or 8 years.
Some Variable Annuities within 401K-403B plans permit loans. This loan provision is advantageous and allows plan participants to borrow pre-tax monies from the plan and use the funds to finance purchases, such as a personal residence. If money is borrowed to finance a primary residence the owner typically must repay the loan back to their own account over typically a maximum of 15 years. Additionally, plan participants can borrow pre-tax monies and use it for other purposes. However, generally it must be repaid over a five year period. (Consult your tax advisor and plan administrator.)
Variable Annuities allow a lump sum distribution of the full value or systematic or periodic withdrawal of the account at the owner's discretion. Plus, Variable Annuity owners have additional options. If the owner desires he/she can voluntarily elect single life income for life options, joint life income for life options, fixed or variable annuitization etc.
There are a number of Variable Annuities to select from and each has their own specific terms and conditions which are generally specific to the state in which you reside.
As an option, most Variable Annuities offer dollar-cost-averaging and automatic account rebalancing.
Variable Annuities can be moved via a 1035 exchange from one variable annuity to another variable annuity without any tax consequences. (Although product withdrawal penalties may apply, excluding No Load Variable Annuities.)
Variable Annuities can be used for individuals in failing health, since the initial value(excluding withdrawals) is protected for heirs from market risk in case of the owners death.
Variable Annuities can be used for people over 59 1/2 or early age retirees who want to control taxes and cash flow on investments and can be used for any age active type investors who want the flexibility to adjust their portfolios without any tax consequences.
Variable Annuities can be used for individuals who want to easily transfer assets at death and avoid probate expense and legal complications and delays at death.
Variable Annuities can be used for savers in fixed rate accounts who want tax deferral on the earned income.
Variable Annuities can be used for individuals who have maxed out their contributions to their retirement plans, and seek tax deferral on additional investments.
Variable Annuities are regulated securities and also are regulated by State Insurance Commissions. Each offered Variable Annuity contract is specific to the state in which the Variable Annuity is offered. Consequently, the terms and conditions of a contract offered in one state might or might not be the same as the terms and conditions of a contract offered in a different state.
All Variable Annuities are offered by Prospectus only. Insurance companies and investment brokers do not provide tax or legal advice. Any tax or legal information is the issuing company's understanding of current laws and regulations, which are subject to interpretation and change. Consult your tax advisor for full details.
Mutual Fund, Variable Annuity and Variable Life prospectuses are available directly from the issuing companies; and, in some cases, can be downloaded directly on the issuing company's internet website.
Systematic and dollar cost averaging within Mutual Funds, Variable Annuities and Variable Life insurance policies does not assure a profit and does not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue purchases through periods of low price levels.
Variable Annuities have internal expense charges, administrative fees, and mortality expense. Most Variable Annuities, (excluding Noload Variable Annuities) typically have declining surrender charges should the contract be totally surrendered over the first several years. Please see prospectus for details.
Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit. All of these investments can loss money.
All Mutual Funds, Variable Annuities and Variable Life Insurance policies are offered by prospectus ONLY. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest.
The tax deferral characteristic associated with variable annuities is not needed when used in an account that is by definition tax deferred (retirement accounts) and according to some sources variable annuities generally have higher fees and internal expenses than mutual funds.