Unlike their fixed counterparts, variable annuities are designed to pump up your savings by giving you a chance for long-term capital growth. They do this by allowing you to invest in stock or bond mutual-fund-like portfolios called subaccounts. As with fixed annuities, gains escape taxation until withdrawal. A fixed annuity will guarantee an interest rate and avoid market fluctuations.
Taxes: Then there are the taxes. As with fixed annuities, you'll pay ordinary income taxes on a variable annuity's gains when you withdraw them, plus a 10% penalty if you're under age 59.5 . Variables also have another little tax twist: Any long-term capital gains you build up in stock and bond subaccounts are taxed at ordinary income rates when you withdraw them. Also, when you make a withdrawal (ideally over the age of 59.5 to avoid penalty) you'll be forced to withdraw the gains and interest first. This forces you to pay taxes on the gains and earnings. Then, assuming you've withdrawn all the gains and interest, any subsequent withdrawals of your contributions (known as basis) is tax free.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Guarantees are subject to the claims paying ability of the issuing insurance company.