Consider contributing the maximum amounts to your other retirement plans first. Don't even think about purchasing a variable annuity until you know you'll be able to make maximum contributions to all other tax-advantaged retirement plansavailable to you, including an IRA.
The longer, the better. Think about accumulating earnings in a low-cost variable annuity for a period of at least seven years if you intend to cash out in a lump-sum withdrawal; longer if the annuity carries higher costs. You'll need that much time to compensate for the taxes you will pay on the large lump sum. (This period of accumulation can be shortened considerably if you plan on withdrawing your money as income over a number of years.)
Seek out low-cost annuities with a wide choice of investment options to take advantage of changes in various sectors of the market.
Explore more aggressive investments when selecting a variable annuity's underlying funds, with emphasis on stocks and stock funds for their long-term growth possibilities. Stock (equity) portfolios have the potential for higher returns as well as greater risk
Consider withdrawing the money gradually when you retire. While everyone's circumstances differ, the longer your money is in the annuity (in both the accumulation and the payout periods), the more you may benefit.
Never put what is already tax-deferred retirement money into an annuity. Even a nondeductible IRA is better than an annuity, since an annuity works like a nondeductible IRA, but with higher expenses. And a Roth IRA is much better than an annuity, since Roth IRA withdrawals are tax-free.
Your money is invested in professionally managed investment portfolios and grows tax-deferred until you take the money out. The tax deferral feature of variable annuities gives you the potential to grow your nest egg faster, due to the power of compounding, which results in a higher rate of return.
You can start your variable annuity with a lump sum purchase or by making periodic contributions on a timetable that fits your needs.
If you are investing post-tax dollars, the government does not impose a limit on these investments, you can invest the amount that is best suited for your retirement goals.
A variable annuity owner can move money among the annuity's investment portfolios without paying any taxes on earnings or gains. Also, since transfers between investment portfolios are tax-free, there are no 1099 forms or other forms to complete at tax time, as there are with mutual fund shards each year. You can make your investment decisions based on the strategy you believe will help you meet your retirement goals, without worrying about the tax implications and the accompanying paperwork.
With a variable annuity, you decide when to begin collecting retirement income. "Although there may be a tax penalty if you begin taking money out of your annuity prior to reaching age 59 1/2, the federal government does not require you to begin withdrawing from your non-qualified annuities when you turn 70 1/2, as is required with many other tax-deferred retirement plans. And, while earnings you take out of the contract are taxed at ordinary income rates (as they are with other retirement plans), with a variable annuity you can control the timing of those withdrawals. Many investors are in a lower tax bracket after they retire and begin withdrawing earnings.
With the benefits and guarantees offered by variable annuities, people are free from worrying about running out of money in retirement. This enables them to more fully enjoy retirement. In return for these benefits and guarantees, variable annuity contract owners pay two types of charges. "Investment portfolio charges," like standard mutual fund charges, are charged by the underlying investment portfolios for investment management services. " insurance charges" pay for the other benefits, guarantees and services offered under the contract. In addition, cancellation of the contract during its early years may trigger an early withdrawal charge, known as a "surrender charge." as with any investment, make sure that you understand the fees, expenses and tax penalties associate d with a variable annuity contract before you invest.
Earnings grow tax-deferred in a variable annuity, but when the tax is ultimately paid, it's at your normal rate, which can reach 39.6 percent. Compare that with the long-term capital gains rate of just 20 percent. Even if your tax bracket isn't very high, if you choose to with draw most of your funds at one time, that will likely kick you into a higher bracket.
If you don't draw out the money before you die, your beneficiaries will be taxed on it. Mutual funds and individual stocks will cost your heirs a lot less.
What's up with the death benefit of a variable annuity? It may not have a lot of value for long term investors for two reasons. Two things have to happen simultaneously for this feature to kick in: Your account value has to be down , and you have to drop dead.
�
Think about it: The higher the tax bracket you will be in when you retire the less attractive a variable annuity looks.
Pros and Cons of Annuities
�
Pros
Allow larger contributions than a 401(k) or IRA
Generate tax-deferred earnings
Offer growth through mutual-fund-like sub-accounts
Protect retirement assets from creditors and lawsuits
Guaranteed death benefit
Cons
Sometimes charge high commissions and costs
Tie up your money for a long time
Early withdrawals are subject to a 10% tax penalty and surrender charges
withdrawals are taxed at your regular tax rate (up to 39.6%), not the more-favorable capital-gains rates
Return to Investment Planning
Return to Home