What are its advantages?
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 anything from half a dozen to 20 or so 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 Then, assuming you've withdrawn all the gains and interest, any subsequent withdrawals of your contributions (known as basis) is tax free.