Be Prudent as you Contemplate Variable Annuities
A variable annuity is designed to protect you from a loss in a capital investment along with a tax-deferred investment. A variable annuity is only beneficial for a fraction of the population that has this particular need. Most investors should stick to plain old mutual funds or the like.
These annuities can be immediate or deferred. A deferred annuity the account grows until you decide it’s time to make withdrawals which should be after age 59 1/2, or you will get zapped with an early withdrawal penalty. You have a choice to annuitize your payments or you can withdraw money as you see fit.
Watch out for the fees with variable annuities as they are numerous. The average annual expense on variable annuity subaccounts are typically more than a full percentage point more than on the average open-ended mutual fund. This is not where is stops as many variable annuities act like B shares of mutual funds, paying commission from the ongoing fees.
Another disadvantage is that your investment in variable annuities is your money is often locked up for up to five years. Withdrawal of funds during this time will result in huge fees at first and typically decrease as they mature.
Your gains in variable annuities are taxed at ordinary income tax rates not at the long-term capital gains tax rates you pay on long-term mutual fund gains. The tax difference can easily eat up the advantage of an annuity’s tax-free compounding.
The pros and cons continue therefore you should ask your agent many questions in order to conclude whether or not variable annuities will solve your problems.
Category: Uncategorized
