A variable annuity is an insurance product offered through an insurance company. Here’s what you need to know:
- The insurance element of variable annuity is what qualifies the investments for tax-deferred growth.
- Like Traditional IRAs or 401(k)s, the earnings (dividends, interest, capital gains) are not taxed in the year earned.
- Instead, all of the income earned is taxed as ordinary income in the year that it is distributed from the annuity.
To help you decide if a variable annuity is the right choice for you, your advisor will weigh the insurance costs of putting your money in an annuity against the tax savings of having your money growth tax deferred.
Who would Benefit from a Variable Annuity?
As an example, a person in a high tax bracket with a long time horizon might be a good candidate for a variable annuity, because both of those things increase the value of the tax deferral. On the other hand, it’s probably not the best choice for a person in a low tax bracket with a short time horizon because the tax deferral won’t be worthwhile.
Changes can Affect Variable Annuities
However, this isn’t always a hard-and-fast rule for whether or not to opt for a variable annuity. Remember that the investment landscape, the economy, and the market are constantly changing, and these factors can affect who will benefit from a variable annuity. The world always changing, and you have to keep up…that’s where we can help, too.