• http://www.wholeinvestor.com Paul Puckett

    Mark,

    This is among the best post I’ve seen covering variable annuities, well done!

    I would like to add/emphasize a few points and clarify one regarding use of variable annuities in retirement plans.

    From the post, “The tax-deferred status, insurance benefits, and wide range of investment options make variable annuities natural choices for use as funding vehicles for retirement plans, such as 401k and 403b plans and IRAs”
    You mention the debate in the industry but I want to emphasize that variable annuities are not a “natural” choice because of their inherent tax deferred status. That is why they are not a good choice. Retirement plans are already tax deferred. There is no such thing as double tax deferral so the use of these products in a retirement product can be expensive to the investor, which is why regulators look at this issue so closely.

    The list of withdrawals is comprehensive and accurate. I would emphasize that when withdrawals are taken as a partial lump sum, as opposed to full surrender, income is withdrawn first. So in the 50/50 scenario where an investor put $150,000 in the contract and it grew to $300,000, if a partial withdrawal is taken the first $150,000 will be treated as ordinary income.

    Investors should also recognize the advantages you describe on any annuitization of the contract. Withdrawals have an “exclusion ratio” resulting in a portion of every payment being treated as a non-taxable return of principal. This ratio is set when the contract is annuitized and is based on age. Older investors often have an exclusion ratio of greater than 75% where only 25% of the payments are taxable.

    Finally, the biggest disadvantage to variable annuities contracts is the treatment of losses. Due to the tax deferred nature of these contracts, there are no capital gains. Gains are treated as ordinary income. It is very difficult to write off losses on variable annuity contracts requiring a knowledgeable CPA.

    All of that said, you covered more material on variable annuities with greater accuracy than I’ve seen on any blog or investment related website. Complicated product but your experience clearly shows in your coverage of variable annuities. Great job!

  • http://jody-bennet.webstarts.com/ Larry Gittens

    Great article on VAs. Variable annuities are sold, not bought. These vehicles have very little usefulness.

    I think the other big point that you touched on was the tax liability when you withdraw from a VA. With government deficits skyrocketing, you have to believe tax rates will rise, which means many folks will end up pulling their money out and paying a higher tax rate. So much for the tax benefits.

  • http://jody-bennet.webstarts.com/ Larry Gittens

    Great article on VAs. Variable annuities are sold, not bought. These vehicles have very little usefulness.

    I think the other big point that you touched on was the tax liability when you withdraw from a VA. With government deficits skyrocketing, you have to believe tax rates will rise, which means many folks will end up pulling their money out and paying a higher tax rate. So much for the tax benefits.

  • Mike @ Annuity Rates

    Every retiree has his own savings that they need to turn
    into a source of income. And annuity is designed exactly to do so. That’s why
    there is a logical appeal to annuity. While choosing an annuity product I think
    Joint Life annuity can be a better selection. Though this type of annuity may
    offer you lesser interest rate than other products but it will enhance your
    probability of utilizing all of your investment.

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