Variable annuities offer buyers the chance to choose among subaccounts, many of which resemble stock funds or bond funds. Your contract value will grow or shrink, depending on how these subaccounts perform. Yet you can defer paying income tax until money is withdrawn from the contract.
Many variable annuity subaccounts are managed by the same companies that run mutual funds. Before buying, check to see if you’re comfortable with the people who’ll be responsible for your investments. On the bright side, improper trading practices are unlikely to be found in variable annuities, due to higher fees and the lack of easy liquidity.
On the downside, all investment earnings will be taxed at ordinary income rates when they’re withdrawn from a variable annuity, so you lose the benefit of low-taxed capital gains. Therefore, you should plan to keep money in a variable annuity for 10 years or longer. Long-term, the value of tax deferral may outweigh the loss of the capital-gains tax break.
