What is a Variable Annuity

What is a Variable Annuity. Variable rate annuities and the main advantages and disadvantages. Should you get no load variable annuities?

Variable Rate Annuities

Variable annuities are investment contracts which also include elements of investments in mutual funds. Variable annuities do not offer guaranteed interest rates, but they offer an investment element. You would be able to choose from a group of mutual funds in which you can invest your money, and any taxes on earnings will be deferred until withdrawal.

Variable Rate Annuities: Tax Advantages

Again, the biggest benefit of variable annuities is that your earnings are only taxed when you withdraw money from the account. This offers significant advantages to investing in ordinary mutual funds, as you are free to withdraw your money from any fund without fear of having to pay taxes on the capital gains.

However, the tax rate on your withdrawals would be higher than the capital gains tax rate – withdrawals from variable annuities would be taxed as ordinary income.

Disadvantages of Variable Annuities

Thus, as noted above, the mortality fee does not actually benefit you and is an unnecessary additional charge. Furthermore, the tax benefits are actually marginal, as the same tax advantages can be achieved by investing in tax-efficient mutual funds such as ETFs or index funds. Also, when you do withdraw your money after the surrender period expires and you are past the age of 59.5, your earnings will be subject to the ordinary income tax rate, which can be more than 20 percent higher than the capital-gains tax rate.

Yet another disadvantage is that should you make a loss on your annuity account, you would not be able to deduct your losses from your taxes – unlike the case for losses in other investment vehicles such as equities or mutual funds.

No Load Variable Annuities

Even with no load variable annuities, the disadvantages of variable annuities noted above are substantial. Mutual funds may be much better investments.

What is a variable annuity

For more on what is a variable annuity and other types of annuities: Top Annuities and Pros and Cons of Annuities

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