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A variable annuity is a type of annuity that has different rules than the traditional fixed annuity. A fixed annuity offers you a guaranteed rate of return on the assets you have invested into the annuity. The variable rate annuity gets the rate of return from investment options that you choose. Therefore, if you have enough investing knowledge to get a higher rate of than what is being offered to you via the fixed annuity, the variable annuity may be your best choice.
Variable Annuity Tax Considerations
A variable annuity is a tax deferred investment property. In other words, you will not pay taxes on the gains your annuity makes until you begin taking payments. If you invest $10,000, and at the end of the year that investment is worth $10,500, you will not owe taxes on the $500 profit until you begin receiving payments.
Variable Annuity Death Benefit
Be sure to ask your broker to confirm, but most variable annuities will be distributed to your heirs in a single lump sum if you were to pass away before you start to receive payments.
There are many different ways to protect your money even after you start receiving payments. For a fee, the annuity company will distribute the unused portion of a guaranteed minimum to your estate when you pass on.
Variable Annuity Fees
The enemy of your variable annuity is without question fees. All investment firms handle the fees differently so it is very important that you do a lot of research before you choose this type of investment. There are certain fees that everyone will have, but other companies seem to just make things up and charge you for it. You must read the fine print and truly understand every aspect of your contract. If you do not understand, hire an independent third party to help explain everything to you.
Surrender Fees
When you purchase the annuity you will have to guarantee the annuity will remain open for a predetermined amount of time. If you have to withdraw money or close the account before your term is up, you will be charged a fee. These charges range from 6% all the way up to 15%.
Mortality Risk Charge
This is a fee you are charged to help offset that banks risk that you will outlive your assets. Oddly, the bank is in the business of taking this risk so it doesn’t seem logical to charge you for it. However, the vast majority of banks charge this fee to anyone that holds a variable annuity. The typical charge is between 1% to 2% of total account value per year.
Admin Fees
It is reasonable to be charged a nominal annual fee for administration and record keeping. However, you should never be expected to pay over $50 per year. If your bank charges you a percentage of your portfolio or over $50, look elsewhere.
Other
Other fees associated with variable annuities are the ones you really have to watch out for. You need to make sure you have a firm grasp on every fee the bank could ever possibly charge you, when and why. Some of the other fees are just bizarre and you would never see it coming if you didn’t read the fine print.
A variable rate annuity is an excellent choice for some people. However, keep in mind that this should only be considered after you have already maxed out your 401k, IRA or both. A variable annuity is not meant to take the place of these traditional retirement investments and should only be used if you have extra money to save for retirement after the above accounts are full.
