Are there variable annuity fees?
Variable annuities are unique investment products because they offer guarantees, which could include a death benefit and access to principal-protection riders. But these guarantees come with fees. Variable annuity fees include mortality and expense charges, sales and withdrawal charges, administrative fees, investment management fees, and rider charges. With any investment product, it’s important to fully understand all the fees you’ll be paying, as they can materially affect the growth rate of your savings. Always ask for a prospectus that clearly defines the benefits and fees of any investment, so you can compare them. And if you have questions, don’t hesitate to ask your financial advisor for a detailed explanation.
Are variable annuities tax-deferred?
All earnings in variable annuities are tax-deferred. They are allowed to grow tax-deferred, and you pay taxes on earnings only (not the principal) when you begin to withdraw funds or begin annuity payments.
An annuity purchased with after-tax funds, or a nonqualified annuity, has no cap on how much you can contribute. It is allowed to grow tax-deferred, and you pay taxes on earnings only (not the principal) when you begin to withdraw funds or begin annuity payments.
This allows your savings to grow at a faster rate than they would if your gains were taxed immediately, and you’ll have more savings down the road. You can also transfer your annuity funds from one investment option to another without paying taxes. When you do finally withdraw your money or begin annuity payments, your earnings will be taxed as ordinary income. In most cases, withdrawals taken prior to age 59½ will be subject to a 10% tax penalty.
With a tax-qualified annuity, you invest pretax money and pay no taxes until you withdraw your money or begin annuity payments. At that point, you will owe ordinary taxes on the withdrawals or annuity payments.
Note that tax-qualified plans already provide tax deferral under the Internal Revenue Code, so the annuity doesn’t give you any additional tax advantages. Since variable annuities offer both insurance and investment features, they are subject to more fees than other tax-qualified funding vehicles.
Is a variable annuity a good idea?
A variable annuity isn’t right for everyone. Depending on your situation, other investment options or a fixed annuity may be a better fit. Variable annuities can be an effective way to supplement retirement income. A variable annuity investment portfolio can be built to address a variety of return and risk objectives. Consult your financial professional to go over all your options.
Scenario #1: Starting early
You are in your 40s and just got a promotion at work. You’re already contributing the maximum to your company-provided 401(k) and would like to find a way to save further for a comfortable retirement. A variable deferred annuity will give you an additional way to grow tax-deferred savings in the market. When you annuitize those savings, you’ll be able to count on annuity payments for your entire lifetime, even if other savings don’t last.
Scenario #2: Converting at retirement
You are retiring next year and want to convert some of your investments into an annuity to protect against running out of savings. You first look at an immediate annuity, which will begin payouts right away, but the monthly payout will be modest. You’d like some market-based growth, and since you plan to live off other investments for at least a few years, a variable deferred annuity can be worth more when you need to annuitize these savings.
How do variable annuities compare with 401(k)s and IRAs?
These taxed-deferred retirement savings vehicles are similar to the accumulation phase of variable annuities. Most financial professionals advise that you take full advantage of them, but both have caps on how much you can contribute each year. So, after you have maxed out your 401(k) or IRA contributions, you may wish to contribute to a variable annuity. Bear in mind that 401(k) and IRA savings aren’t guaranteed to last for your entire life, as lifetime annuities are. You could, however, roll over a portion of your 401(k) or IRA savings into an immediate lifetime annuity when you are ready for retirement.
Conclusion
Variable annuities are one of many important retirement savings tools. To find the right mix and ensure that you and your family are taken care of now and in the future, you should have a knowledgeable financial professional on your side. We can help you go over your retirement checklist and create a customized plan to get the most out of your golden years.
