“Tax deferral,”
“diversification,” and “hedge against inflation” are all terms that carry
positive messages among individual investors because they mean dollars invested
are being maximized to fulfill long-term funding needs. They are also all terms
associated with variable annuities.
If they sound
positive to you, ask yourself the following questions:
- Are you a taxpayer seeking a way to help reduce
the impact of today’s high tax rates on your income?
- Have you “maxed out” your Individual Retirement
Account and 401(k) plan contributions for the current year?
- Do you desire the ability to control where your
investment dollars are placed?
- Are you a retiree facing greater taxation of
your Social Security benefits and wondering how you can protect yourself?
- Are you seeking a life income option, as well as
a good hedge against inflation to protect the dollars you’ll need during
retirement?
- Would a guaranteed death benefit give you an
extra sense of security for your investment?
If the answer to
any of those questions is “yes,” a variable annuity may be the solution you
seek.
It offers very
distinct benefits over other long-term investment vehicles and it can help meet
retirement savings needs either through a tax-qualified plan or as a supplement
to other retirement funding plans.
Variable annuities
can offer you (the individual investor) exceptional benefits, including the
professional management of mutual funds, some of the tax-deferral advantages of
an IRA or 401(k) without contribution limits, and certain guarantees of the
issuing insurance company, including the passing of your original investment,
or cash value if greater, intact to a named beneficiary in the event of your
death during the accumulation phase.
The Accumulation Phase
A variable annuity
differs from a conventional fixed annuity in that its results are based on the
performance of the underlying mutual funds offered to and selected by the
contract owner.
Like a fixed
annuity, however, a variable annuity can be paid for and put into operation on
a deferred or immediate basis.
The
Payout Phase
While we all know
the benefits of the tax-deferred accumulation of an annuity, one often
overlooked feature in a variable annuity is a variable payout. If you have a fund
manager who has performed well for you during the accumulation phase of the
contract, why would you want to give that up to invest with someone else?
Upon retirement or
maturity of an annuity contract, you have three choices: a lump-sum
distribution, which creates an immediate taxable event on the full amount; a
systematic withdrawal program that requires withdrawal of earnings, which are
taxable as they are received, before principal; or the election of a variable
payout or a part-variable and part-fixed payout.
Variable Annuity vs.
Mutual Fund
There are two very
important advantages to the purchase of the variable annuity that the mutual
fund purchase will not provide. First, during the accumulation period, money
paid into the variable annuity grows on a tax-deferred basis. This means there
is no current tax on the investment growth of the annuity fund.
Second, the
variable annuity provides a lifetime annuity payout option. Systematic
withdrawals from a mutual fund do not ensure lifetime payments. When comparing
variable annuities to mutual funds, remember to factor in the insurance costs of
the former; there will be mortality and expense fees associated with providing
a death benefit guarantee and administrative services under the contract.
Also, the liquidity
provided by mutual funds and tax penalties associated with premature
withdrawals from annuities should be considered, among other issues, when
choosing between mutual funds and variable annuities.
In addition, a
variable annuity is protected property. The annuity cannot be borrowed against
or pledged by you to creditors, except under certain limited circumstances. In
addition, most contracts offer annuity options that will provide for your
beneficiaries to receive an amount fixed by the contract, without waiting for
probate, should you die prior to the completion of annuity payments.
Consult your
financial professional to determine if a variable annuity may indeed be the answer
you seek to your tax and retirement funding questions.
