Variable Annuities

Variable annuities became very popular after the federal government reduced the tax benefits for people with higher income in the 1980s.

In fact, they jumped from $9 billion in variable annuity sales in 1986 to $98 billion in 1998. Lets look at what they are and how they work.

Variable annuities are a tax-deferred investment vehicle that comes with a minimal insurance contract so they can qualify for their tax-deferred status. The insurance is not much more than a thin wrapper to secure that favorable tax treatment. It only covers your contributions. It does not cover any of your investment gain.

Variable annuities can be immediate or deferred. Once you reach 59 ½ you can begin withdrawing the funds without penalty. Prior to that time withdrawals are subject to tax and a 10% penalty. When you withdraw the funds, they are taxed at ordinary income tax rates.

For whom do variable annuities make the most sense?

For retirees who fear they may outlive their capital, for high income individuals who don't qualify for a Roth and have maxed out on all other retirement options, and individuals who could be a potential target for a law suit. This also may be an attractive option for providers of personal services who could be liable in a malpractice suit, because in most states assets in life insurance policies and annuities are credit protected.