Lower Tax Bills
Lower tax bills are another advantage enjoyed by many variable annuity owners. Because annual earnings from a variable annuity compound tax-deferred, no income taxes will be due on these amounts until you begin withdrawing money from your account.
As a result, it may be possible over time to accumulate significantly more assets through a variable annuity than through taxable investments that earn similar rates of return.
Of course, any withdrawal of earnings from a variable annuity is taxable as ordinary income. And, if you begin these withdrawals prior to age 59 ½, a 10% federal tax penalty may also be applied, same as an IRA or other retirement plans.
Withdrawal Flexibility
Given that average American life expectancies continue to rise, your retirement savings may have to last longer than your original estimate.
Fortunately, a variable annuity allows you to choose the withdrawal option that's best for you—either a single lump sum payment or, if you “annuitize,” a steady guaranteed income stream for the rest of your life.
Many other retirement plans require you to start withdrawing income by a certain date, regardless of your personal needs at that time. IRAs, for example, mandate that your withdrawals begin in the year following the year in which you turn 70.
But, with a variable annuity, you can postpone any withdrawals of non-qualified funds until age 85—and in some cases even later.
Improved Inheritance Options
Just as a variable annuity provides you with income during your life, it'll also pay benefits to your beneficiaries after your death. Most variable annuity holders are free to choose the death benefit that best suits their inheritance wishes. Some choose the basic guaranteed death benefit, which guarantees that, upon the death of the contract owner, his or her designated beneficiaries will receive the greater of the current market value of the annuity or the value of your original annuity contributions (adjusted for withdrawals).
Other contract holders find that an enhanced death benefit better suits their needs. Usually offered for an additional charge, an enhanced death benefit may guarantee that your beneficiaries will receive, for example, the highest anniversary value your contract has attained or your original contributions compounded by 5% per year. Regardless of which death benefit you choose, your beneficiaries are assured of receiving at least the value of your original contribution. Note, however, that the actual payment of any guaranteed death benefit will depend on the claims-paying ability of the company that issues your annuity.