What Is a Variable Annuity and Why Buy One?
Similar to a fixed annuity, a variable annuity is a contract purchased from an insurance company usually to accumulate funds for retirement. The money in the contract accumulates tax-deferred and can eventually be used to provide income at regular intervals for a specified period of time or for life. Unlike fixed annuities, variable annuities allow you to decide where to place your money among a variety of investment options, and they offer a number of other features not available in a fixed annuity.
Variable Annuities
Variable annuities combine the growth potential, investment flexibility, and diversification that you enjoy with many other investments, along with the annuity’s ability to defer taxes. In addition to a Fixed Account with a guaranteed interest rate, variable annuities usually offer a choice of several different types of professionally managed variable investment portfolios — including stock, bond, money market, and specialty funds. You can allocate money among one or a number of these portfolios, depending on your investment objectives and risk tolerance level. Of course, the performance of these portfolios is not guaranteed. Assets allocated to the investment portfolios are subject to market risks and will fluctuate in value. However, allocating assets among several investment options may reduce your risk and increase your opportunity for potential returns over the long term.
Tax Advantages
Variable annuity earnings also accumulate tax-deferred. With tax deferral, you don’t pay taxes on earnings while they remain in your account. Tax-qualified retirement plans (like IRAs, TSAs and SEPs) already provide tax deferral under the Internal Revenue Code, so the tax deferral of an annuity does not provide any additional benefits. Also, variable annuities are subject to additional fees and expenses that other tax-qualified plan funding vehicles may not be subject to. Future performance cannot be predicted, but insofar as there are earnings, they only become taxable when withdrawn and then they are treated as ordinary income. For tax purposes, earnings are always considered withdrawn first. Since the earnings only become taxable when they are withdrawn, you can control when you receive your income and how much taxable income you receive each year from the variable annuity. In addition, until they are withdrawn, deferred annuity earnings are not used in the calculation to determine current taxes due on Social Security benefits. Under current tax law, up to 85% of your Social Security benefits could become subject to taxation, depending on your level of income. Earnings from other investments are included in the calculation of what percentage of your Social Security benefits gets taxed.
Access to Your Money
Variable annuities also allow you to access your money through withdrawals. You can usually withdraw at least 10% of your cash value each year without incurring any company- imposed surrender charges. Withdrawals in excess of that amount may be subject to surrender charges during the first several years. Withdrawals prior to age 59 1/2 may also be subject to a 10% IRS penalty tax. Another popular feature of variable annuities is a guaranteed death benefit that protects your beneficiaries in the event of your death before annuitization. Generally, your death benefit will never be less than the total of the premiums you paid, less any withdrawals. State-of-the-art variable annuities even offer a death benefit guarantee that locks in the gains of your contract every few years or even every year. This death benefit “step-up” can protect your beneficiaries during periods of market decline. Guarantees are based on the claims paying ability of the insurer.
Make Your Decision Wisely
While variable annuities provide a sensible solution to many retirement needs, be sure to do your homework. Make it a point to research the financial strength, industry reputation, and commitment to quality of the insurance company issuing the annuity, especially if you plan to put some of your money into the Fixed Account. Also, check out the individuals responsible for managing the variable investment options and the performance of those investment options. You have worked hard to enjoy your retirement and it’s important that you choose an insurance company that offers a product that provides for your specific needs.
For more information on any of these products, please contact Fran Armendariz, Registered Representative for NYLIFE Securities (Member NASD/SIPC), at 6850 W. 52nd Ave. Suite 200 Arvada, Co 80002 phone 303 403-5600 ext. 5618 for a prospectus. Review the prospectus carefully before you invest or send money.
To obtain a copy of the prospectus, please contact your NYLIFE Securities Registered Representative, or call 1-800-598-2019. Investors are asked to consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Both the product prospectus and the underlying fund prospectuses contain this and other information about the product and underlying investment options. Please read the prospectuses carefully before investing.