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Should Anyone Buy a Variable Annuity?

There is a lot of money invested in variable annuities right now, close to $140 billion actually.  But there are quite a few variable annuity haters out there as well.  Since variable annuity products have a lot of moving parts, it’s important to know what is involved before purchasing one.  Marketwatch’s Stephen Williams wrote an article to help people determine “How to know if a variable annuity is right for you.”  Variable annuity haters say that the products are too complicated and too expensive.  But proponents of variable annuities say that the cost is worth the benefits that you receive, including guaranteed lifetime income and tax-deferred growth.  Williams listed the pros and cons to help consumers better understand variable annuity products.

There are five main benefits to variable annuities.  The first is that you can take advantage of potential market gains.  Your money is professionally managed and you have many different investment options to choose from.  The value of your account changes based on the market performance of your investment choices.  Your savings grows tax-deferred with variable annuities.  Once you start receiving income from your annuity, it will be taxed as ordinary income.  Since non-qualified variable annuities are not subject to RMD rules at age 70 1/2, you can keep growing your money tax-deferred as long as you want.  Money can also be transferred between investment options without any tax consequences.  Variable annuities are one of the only ways that you can guarantee lifetime income with an investment.  You can create a lifetime income stream and even account for inflation or create an income floor at an additional cost.

Another benefit of variable annuity products is that they can provide a death benefit to your heirs.  At an additional cost, your heirs will be paid out the entirety of your premium less any withdrawals that you had made.  Their benefits are not subject to any negative market fluctuations that may have occurred.  Death benefits from variable annuities are not subject to probate, which can save a lot of hassle for your heirs upon your death.  The final benefit listed is that non-qualified variable annuities are not subject to the contribution limits that qualified retirement plans are.  This allows you to contribute unlimited money to your retirement savings.

There are some cons associated with variable annuity products as well.  Markets are volatile so you have to decide whether you are willing to subject your money to the fluctuations in order to take advantage of potential gains.  Variable annuities have surrender charges that can be steep if you take your money out before the surrender period is up.  That time frame is usually from 5 to 7 years.  If you purchase a variable annuity, make sure that you are doing it for the long term rather than the short term.  There can be some disadvantages when it comes to the tax treatment of variable annuities.  Your income from these products is taxed at the ordinary income level rather than the lower capital gains tax rate.  If you expect to be in a higher income tax bracket in retirement, this could be a disadvantage.  This also applies to those who inherit variable annuities.  All annuity guarantees are subject to the claims paying ability of the insurance company, so make sure that you choose a reputable insurer.  It’s also important to know all of the fees and expenses associated with the particular variable annuity that you are considering.

Variable annuities can be wise investment choices for many consumers, but make sure that you know the pros and cons before making a permanent decision to purchase one.

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