A variable annuity is purchased from an insurance company, and creates a contract where you make an initial payment, then receive either regular payments over time or a lump sum at the end of the contract. Annuities are tax-deferred, allowing you to potentially create growth while deferring taxes until a later date.
Tax deferral can be a benefit if you want to reduce your tax burden now. The annuity will only create taxable income when you take payments or a lump sum later, which for many clients is after retirement when their gross income will be less. Once you purchase the annuity, the income phase begins, although as noted you can defer any payments until later for the tax benefit.
When you purchase an annuity you are buying “units” of the investment portfolio making up that annuity. The annuity may make use of stocks, fixed income instruments, or other investments. Your annuity can gain value over time, but you must keep in mind that it can also lose if the market suffers.
When it comes time to accept a distribution from an annuity, interest is always considered to be withdrawn first for tax considerations. So, you might owe full taxes on your distribution if all you receive is accumulated interest from the annuity. Also, because the IRS encourages people to save for retirement, there could be additional penalties due if you withdraw from an annuity before age 59 1/2. Beneficiaries may only owe taxes on earnings from an annuity, and spouses may have additional deferral opportunities. Understand these tax implications before purchasing any annuity.
The Insurance Hub is prepared to answer any questions you have about variable annuities and can help you pick annuities to suit your needs. Contact the Insurance Hub agents today for more information!