First, let’s make one thing clear. We believe you should only consider purchase of an annuity after you have fully funded your IRA, 401(k), or 403(b) for the year. These retirement vehicles are put aside before you pay income tax, and can be your first step in planning your financial confidence in retirement.

But if you have additional funds to invest, where will you put the money? Mutual funds? Bonds? Variable annuities? All may be present in a well-rounded, diversified portfolio. Read on to learn about some important advantages of variable annuities that can allow them to fit into your financial strategy. The variable annuity (like any annuity) is a place to put an unlimited amount of money without paying taxes on the earnings, until you start withdrawing funds. Variable annuities are also available inside an IRA, Roth IRA, 403(b), SEP IRA, or other retirement vehicle. You may find advantages to arranging your variable annuity in that way, but be sure to talk with a trusted financial professional first.

Unlimited Funds, Tax-Deferred

There is no limit to how much premium you can put into a variable annuity (or other annuities). All the value grows tax-deferred, and you don’t pay taxes until you withdraw the money and interest.

Benefits and Features

There is no qualifying of any kind with an annuity, and so long as you are not receiving payments (deferral phase only), there is no IRS reporting of any kind (no 1099 or tax bill). An additional benefit of an annuity is that it is not attachable by most creditors and it avoids probate in all 50 states.

Additionally, Many annuities offer features and benefits that are not found in other investments (such as mutual funds). The most popular include Death Benefits and Living Benefits. Learn more about the primary features of variable annuities

Multiple Investment Choices

Many variable annuities allow you multiple investment choices ranging from fixed accounts, fixed income, money markets, small cap, mid cap, large cap, domestic, international, specialty, and sector funds, allowing investors to employ growth, value and blend strategies. Many permit investors to choose from multiple fund family choices, such as funds from Fidelity, Alliance, Putnam, Janus, MFS, T. Rowe Price, and more.

Sub-Account Switching

Most variable annuities allow you to move freely between the various fund sub-accounts without incurring any cost. Furthermore, transactions between the different investment choices generates will not generate a tax bill (1099).

Important Considerations

That said, investors need to be careful to understand the annuity in which they may invest. First, it is important to consider the rating of the insurance company issuing the annuity, particularly in the case of a fixed annuity. Second, it is important to understand the level of fees paid to the brokers that market the annuities on behalf of the insurance company. Unfortunately, many agents, brokers, financial planners, and others who market annuities have been known to overstate annuity advantages, and sometimes recommend annuities based on the fee the broker will receive, rather than the appropriateness to the individual investor. It is also important to note that any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken prior to 59½ years of age

For more considerations, see our Annuity FYI Checklist, or contact an Annuity FYI Expert to see if an annuity is right for you. If you’re already sure, click here to learn about the different, specific types of annuities, and see those that Annuity FYI believes to be the top annuities available on the market today.

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