Why You Must Read The Fine Print Before Buying A Variable Annuity

As with other annuities, this is a retirement-friendly option - issued by insurance companies - that is also tax-deferred. With this type of annuity you can choose your investments, and your return depends on the performance of those investments.

Investments

The options for investment run as mutual funds and are called subaccounts. While other annuities with fixed rates can suffer from inflation, in the right circumstances a variable annuity will outpace that.

Risks

The obvious risk is that, if performance is bad, you could receive a much lower payout. There are usually higher fees for variable annuities also. Once you withdraw the money then you have to pay tax on it, and unfortunately gains are treated like normal income. As with other annuities, you cannot withdraw any money before you hit 59.5 years as you’d then have to pay another 10%. As a final note, there are some strong sales pitches for variable annuities - so as with all financial products, make sure you have done your research and read all the small print before making a decision. Once you buy an annuity you can’t easily cancel it.

Benefits

Its tax-deferred status is one of the main benefits of this product, allowing you to supplement your 401k and IRA retirement funds. A variable annuity shouldn’t be your first choice for retirement, as the fees can really be very high and can counteract any gains you might make. Choose one with low annual fees. Once you hit payment, then of course you gain from all the advantages of an annuity, having a regular and reliable source of income.