Variable annuities have pros and cons
* Advantages: You can invest in a variety of investment options and defer the income tax.
* Drawbacks: You still have investment risk. Fees can be substantial and withdrawals may be taxed at ordinary income rates, rather than favorably-taxed long-term capital gains.
Recently, many issuers of variable annuities have begun to offer guaranteed lifetime withdrawal benefits (GLWBs). You are allowed to withdraw a certain percentage of your investment each year, for as long as you live.
Say Ann Brown invests $100,000 in a variable annuity with a GLWB. Ann might be entitled to withdraw $5,000 (5% of her investment) each year, even if the value of her investments inside the annuity falls sharply. What’s more, Ann’s GLWB might increase if her investments gain value.
If you are interested in a GLWB annuity, read the fine print. See how much extra you’ll pay for this benefit, and if you will be restricted to certain investments. Also, check to see how your GLWB will be affected if you take more than the guaranteed amount. If you withdraw half of your money from the annuity contract, for example, your GLWB might be cut in half.
