Fast Fact30% of American workers believe they are “very likely” or “somewhat likely” to live to age 95 (source: Employee Benefit Research Institute). |
Quote of the DayDo not do to others what angers you if done to you by others. - Socrates |
Free Subscription
Today's Headlines
Tomorrow's Headlines
HOW A VARIABLE ANNUITY WORKS
1.
In the accumulation phase, you (the annuity owner) send your premium payment(s) (all at once or over time) to the annuity issuer. These payments are made with after-tax funds, and you may invest an unlimited amount.
2.
You may choose how to allocate your premium payment(s) among the various investments offered by the issuer. These investment choices, often called subaccounts, typically invest directly in mutual funds. Generally, you can also transfer funds among investments without paying tax on investment income and gains.
3.
The issuer may collect fees to manage your annuity account. These may include an annual administration fee, underlying fund fees and expenses which include an investment advisory fee, and a mortality and expense risk charge. If you withdraw money in the early years of your annuity, you may also have to pay the issuer a surrender fee.
4.
The earnings in your subaccounts grow tax deferred; you won't be taxed on any earnings or capital gains until you begin withdrawing funds or begin taking annuitization payments.
5.
With the exception of a fixed account option where a guaranteed* minimum rate of interest applies, the issuer of a variable annuity generally doesn't guarantee any return on the subaccounts you choose. While you might experience substantial growth in your investments, your choices could also perform poorly, and you could lose money.
6.
Your annuity contract may contain provisions for a guaranteed* death benefit or other payout upon the death of the annuitant. (As the annuity owner, you're most often also the annuitant, although you don't have to be.)
7.
Just as you may choose how to allocate your premiums among the subaccount options available, you may also select the subaccounts from which you'll take the funds if you decide to withdraw money from your annuity.
8.
If you make a withdrawal from your annuity before you reach age 59½, you'll not only have to pay tax (at your ordinary income tax rate) on the earnings portion of the withdrawal, but you may also have to pay a 10 percent premature distribution tax.
9.
After age 59½, you may make withdrawals from your annuity proceeds without incurring any premature distribution tax. Since annuities have no minimum distribution requirements, you don't have to make any withdrawals. You can let the account continue to grow tax deferred for an indefinite period. However, your annuity contract may specify an age at which you must begin taking income payments.
10.
To obtain a guaranteed income stream for life or for a certain number of years, you can annuitize.* Once you decide to do so, you may not be allowed to make any more withdrawals or invest any more in your annuity. The amount of your annuitization payments will depend on many factors: the cash value of your account, the age(s) and gender(s) of your annuitant(s), and the payment option you choose. Whatever annuitization option you select, you can't change it later.
11.
You'll have to pay taxes (at your ordinary income tax rate) on the earnings portion of any withdrawals or annuitization payments you receive.
*All guarantees are subject to the claims-paying ability of the issuing company.
