Variable Annuity Guide: Benefits, Risks, and Fees

Aug 30

Your retirement savings may need to serve several purposes at once. They may provide monthly income, preserve money for future care, support a spouse, and leave something behind for your family. A variable annuity may address some of these goals through investment subaccounts, tax-deferred growth, lifetime-income features, and death benefits. It may also introduce market risk, layered fees, surrender periods, and complex withdrawal rules. That mix makes careful evaluation important. This guide breaks down how variable annuities work, what they may offer, the risks and taxes to consider, and how to compare one with other retirement-income choices.

Key Takeaways

Match the contract to your goals: Consider whether you need market growth, lifetime income, legacy support, or tax-deferred savings before choosing a variable annuity.
Calculate the full financial impact: Review investment risk, rider costs, surrender charges, withdrawal limits, tax rules, and the insurer’s ability to honor guarantees.
Get a personalized review before committing: Compare the annuity with your 401(k), IRA, Roth accounts, fixed annuities, MYGAs, and other income sources as part of a coordinated retirement strategy.

What Is a Variable Annuity and How Does It Work?

A variable annuity is an insurance contract designed to combine long-term investing with retirement income features. You purchase the contract from an insurance company with either one payment or a series of payments. The money is then allocated among investment options, often called subaccounts, which may hold stocks, bonds, or other securities.

Unlike a fixed annuity or MYGA, a variable annuity’s value generally changes with the performance of its underlying investments. This creates the potential for market-based growth, but it also means your account can lose value. The SEC’s overview of variable annuities explains how these contracts work and outlines features investors should review.

Variable annuities may also offer tax-deferred growth, death benefits, and optional income guarantees. These features come with contract terms, fees, and restrictions that vary by product. Before considering one, review how the annuity fits with your retirement income needs, other accounts, tax situation, and comfort with market risk. Newman Financial Group’s Retirement Safeguard program provides a framework for reviewing these factors as part of a broader retirement strategy.

Use an insurance contract with investment subaccounts

When you buy a variable annuity, you enter into a contract with an insurance company. The contract explains how contributions are invested, which benefits are available, and how income or death benefits may be paid. Since the insurer makes the contract’s guarantees, its financial strength and ability to meet its obligations are important considerations.

Your contributions are placed into investment subaccounts that you select from the options offered by the contract. These subaccounts may resemble mutual funds, but they operate within the annuity rather than a standard brokerage account. Their performance generally affects the contract’s value, along with any applicable charges, adjustments, or guarantees.

A variable annuity may also allow you to convert the account into a stream of periodic payments. This insurance feature can support retirement income, but the details depend on the specific contract. Review the prospectus, contract, and rider disclosures carefully before making a decision.

Fund and allocate premiums

You can fund a variable annuity with a single purchase payment or multiple payments over time. The contract may set minimum contribution amounts, payment schedules, or rules for adding money. Once your payment is accepted, you generally choose how to divide it among the available investment subaccounts.

For example, you might allocate part of your premium to stock-focused subaccounts and another portion to bond-focused options. Your choices should reflect your time horizon, retirement income goals, and ability to tolerate market declines. Some contracts also offer automatic rebalancing or allocation programs that periodically adjust your investments.

Your allocation may not be permanent. Depending on the contract, you may be able to transfer money between subaccounts. However, the insurer may limit the number of transfers, restrict certain investment changes, or apply special rules to guaranteed benefits. Review these provisions before assuming you can make unlimited changes. MassMutual’s explanation of variable annuities provides additional information about premiums and investment choices.

Move through accumulation and income phases

Variable annuities generally have two stages. During the accumulation phase, your money remains invested in the contract. Its value may rise or fall based on the performance of your selected subaccounts. For a nonqualified annuity, earnings typically grow tax-deferred until withdrawn, although tax deferral does not eliminate future taxes.

During the income phase, you may take withdrawals, begin a guaranteed income feature, or annuitize the contract. Annuitization means exchanging some or all of the account value for a series of payments based on the contract’s terms. Payment amounts may depend on the payout option, account value, interest assumptions, and the age or life expectancy of the annuitant.

You do not necessarily have to annuitize to receive income. Some owners continue investing while taking scheduled withdrawals, but withdrawals can reduce the account value and affect available guarantees. Annuity.org’s guide to variable annuities explains the accumulation and payout phases in more detail.

Define owner, annuitant, and beneficiary roles

A variable annuity can involve three different people, and understanding each role helps prevent confusion. The owner purchases the contract, controls investment selections, names beneficiaries, and usually decides when to take withdrawals or begin income. The owner also handles important contract decisions during the annuity’s lifetime.

The annuitant is the person whose age or life expectancy may be used to calculate income payments. The owner and annuitant can be the same person, but they do not have to be. Changing the annuitant may be restricted by the contract and could affect taxes, guarantees, or other benefits.

The beneficiary is the person or entity designated to receive a death benefit or remaining contract value after the owner or annuitant dies, depending on the contract structure. Beneficiary rules can differ for spouses, trusts, and inherited annuities. Protective Life’s explanation of variable annuity roles offers helpful background, but the specific contract controls.

Take withdrawals, annuitize, or create lifetime income

At retirement, you may have several ways to use a variable annuity. You could take occasional or scheduled withdrawals while leaving the rest of the account invested. You could annuitize the contract and receive payments for a set period or for life. Some contracts also offer optional living-benefit riders designed to provide income guarantees while allowing the account to remain invested.

Each choice has tradeoffs. Withdrawals can reduce your account value, affect future income, and potentially trigger surrender charges or taxes. Annuitization can create a predictable payment stream, but it may limit access to the money used to establish that stream. A living-benefit rider may provide additional protection, but it usually adds a fee and includes specific conditions.

Before choosing an income method, compare the contract’s guarantees with your expected expenses and other income sources, such as Social Security, pensions, IRAs, and 401(k) assets. Newman Financial Group’s retirement income services can help you review how a variable annuity may fit into a broader distribution plan.

What Benefits Can a Variable Annuity Offer?

A variable annuity combines an insurance contract with investment subaccounts and retirement income features. Depending on the contract, it may help you pursue long-term growth, defer taxes on investment earnings, create income, and provide benefits for your beneficiaries. These features can make a variable annuity worth considering as part of a broader retirement plan.

The benefits are not identical across all contracts. Investment choices, fees, withdrawal rules, rider costs, and the insurer’s guarantees can vary widely. Before purchasing, read the prospectus and contract carefully, then compare the annuity with other retirement-income options. Newman Financial Group provides guidance on annuities and retirement strategies based on your goals, income needs, and risk preferences.

Grow retirement savings tax-deferred

A variable annuity allows investment earnings to grow tax-deferred while they remain in the contract. You generally do not pay taxes on gains each year, which means more of the account value can remain invested during the accumulation phase. This may be helpful when you are saving for a retirement goal that is still years away.

Tax deferral does not mean the money is tax-free. Withdrawals are generally taxed as ordinary income to the extent they represent earnings, and distributions taken before age 59½ may be subject to an additional tax in some circumstances. The IRS explains the general tax treatment of annuities, but your individual results may depend on whether the contract is qualified or nonqualified.

Gain market exposure and growth potential

A variable annuity typically lets you allocate premiums among investment subaccounts. These options may include portfolios that invest in stocks, bonds, or a combination of investments. This gives you an opportunity to participate in market growth instead of relying only on the declared interest rate offered by a fixed annuity or MYGA.

Market exposure also brings the possibility of losses. Your account value may decline when the investments perform poorly, and growth is not guaranteed unless a specific contract feature says otherwise. Investor.gov’s explanation of variable annuities notes that these products are generally intended for long-term goals, not money you may need in the near future.

Choose and adjust investments

Most variable annuities offer a selection of investment subaccounts, allowing you to create an allocation that reflects your time horizon and tolerance for market fluctuations. Your choices may look different when you are decades from retirement than they do when you are preparing to take income.

Many contracts also allow you to transfer money between available subaccounts without triggering an immediate tax bill. However, the contract may limit the frequency of transfers, restrict certain investment combinations, or apply special rules to transfers involving riders. Review each option’s expenses and investment objective before making changes. An allocation should support your overall retirement plan rather than respond to every short-term market movement.

Add living-benefit riders and income guarantees

Some variable annuities offer optional living-benefit riders that may provide features such as guaranteed lifetime income or a protected withdrawal amount. These riders can help address the concern of outliving your savings, particularly when they are coordinated with Social Security, pensions, and other income sources.

Guarantees are backed by the issuing insurance company and depend on the contract’s conditions. A rider may add an annual charge, limit your investment choices, or use a benefit base that is different from your actual account value. Ask when payments can begin, how withdrawals affect the guarantee, and whether the insurer can change any provisions. Newman Financial Group’s Retirement Safeguard program can help you review retirement-income needs and protection strategies.

Provide death benefits and legacy support

A variable annuity may include a standard death benefit for beneficiaries if the owner dies during the accumulation phase. Some contracts also offer optional death-benefit riders that may increase the amount available to beneficiaries or provide additional legacy features.

The death benefit is not necessarily equal to your account value. Its amount may depend on the contract, investment performance, withdrawals, rider elections, and the timing of your death. Beneficiary designations also deserve regular attention after marriage, divorce, the birth of a child, or another major life change. Protective Life provides an overview of how variable annuity death benefits may work, though your contract will control the actual benefit.

Save beyond 401(k)s and IRAs

A 401(k) or IRA may limit how much you can contribute each year. A nonqualified variable annuity does not have the same annual contribution limit, although the contract may include minimum premiums, maximum funding rules, or other restrictions. For someone who has contributed fully to available retirement accounts, an annuity may offer another tax-deferred vehicle for long-term savings.

That flexibility does not make a variable annuity suitable for every dollar you save. Surrender periods, fees, market risk, and tax rules may make it a poor fit for emergency funds or short-term expenses. Consider how the contract would work alongside your 401(k), IRA, Roth accounts, insurance coverage, and planned retirement income. A personalized review can help determine whether the potential benefits justify the costs and restrictions.

What Risks Come With a Variable Annuity?

A variable annuity can provide tax-deferred growth and access to market-based investments, but it also comes with risks that deserve careful review. Your results may depend on market performance, the investment subaccounts you select, contract fees, withdrawal rules, and the insurer’s ability to meet its obligations.

Before purchasing a variable annuity, read the prospectus, contract, and rider disclosures. The SEC’s investor guidance on variable annuities recommends reviewing the investment options, charges, risks, and optional benefits before making a decision.

Accept market risk and possible losses

The value of a variable annuity’s investment subaccounts can rise or fall with the markets. If the stocks, bonds, or other investments in your selected subaccounts perform poorly, your account value may decline. Unlike a fixed annuity, a variable annuity generally does not promise that your principal will remain unchanged.

Market losses can affect the amount available for future withdrawals, income payments, or a beneficiary benefit, depending on the contract. Some riders may offer specific protections, but they typically include additional costs and conditions. They may protect a defined benefit base rather than your entire account value.

Review how much of your retirement savings would be exposed to market movements. Newman Financial Group’s retirement income services can help you consider a variable annuity alongside your other income sources and retirement assets.

Manage sequence-of-returns risk near retirement

Sequence-of-returns risk is the possibility that poor investment returns occur early in retirement, just as you begin taking withdrawals. Two investors could receive the same average return over several years, yet the person who experiences losses first may have less money left because withdrawals took place during the downturn.

A variable annuity may address certain income concerns if you purchase an optional living-benefit rider, but it does not automatically remove market risk. The rider may include withdrawal limits, waiting periods, benefit-base rules, and other requirements. Taking more than the permitted amount could reduce or eliminate the guarantee.

A variable annuity is generally not designed for short-term goals. Investor.gov explains that early withdrawals may involve taxes and surrender charges, which makes timing especially important as retirement approaches.

Weigh surrender periods, withdrawal limits, and liquidity

Many variable annuities include a surrender period. During this time, the insurer may charge a fee if you withdraw more than the contract permits. The charge often declines as the surrender period progresses, but the schedule varies. Some contracts also limit penalty-free withdrawals to a percentage of the account value each year.

These restrictions may make it harder to access money for an unexpected medical expense, home repair, family need, or another large cost. Tax rules may apply as well, especially when you withdraw earnings from a nonqualified annuity before age 59½.

Before signing, ask how much you can withdraw without a surrender charge, when the surrender period ends, and whether the contract offers free withdrawals. Annuity.org’s overview of variable annuities explains how surrender charges can affect liquidity.

Confirm guarantees with the insurer and contract

A variable annuity may include guarantees for lifetime income, a death benefit, or a minimum benefit base. These features do not all work the same way. A guaranteed income amount may depend on your age, withdrawal rate, rider elections, and the insurer’s calculation method.

Ask whether a guarantee applies to your actual account value, a separate benefit base, or only a future income payment. Confirm what happens if you take an excess withdrawal, change investments, stop paying premiums, or cancel the rider. Request examples showing how the benefit could change under different market and withdrawal conditions.

Guarantees are obligations of the issuing insurance company, not the investment subaccounts. Review the insurer’s financial strength and the contract language carefully. Protective Life’s variable annuity guidance also recommends reviewing the contract’s objectives, risks, charges, expenses, riders, and investment options.

Understand that variable annuities lack FDIC insurance

Variable annuities are insurance contracts, not bank deposits. They are not insured by the FDIC, and the investment subaccounts can lose value. The insurer’s claims-paying ability supports contractual guarantees, so the company’s financial condition matters.

This does not make every variable annuity unsuitable. It means you should understand what protection the contract provides and what it does not. State guaranty associations may offer limited protection in certain situations, but coverage rules and limits vary by state. They should not replace a review of the insurer’s financial strength.

Ask which benefits are guaranteed, which depend on investment performance, and what could happen if the insurer experiences financial difficulty. The National Association of Insurance Commissioners provides consumer information about insurance company regulation and oversight.

Assess complexity, investment limits, and rider restrictions

Variable annuities may include numerous investment options, multiple benefit riders, withdrawal formulas, and detailed fee schedules. These features can make the contract difficult to compare with a brokerage account, IRA, fixed annuity, or MYGA.

The insurer may limit how often you can transfer money between subaccounts or restrict transfers into certain investments. A living-benefit rider may also require you to follow a particular allocation model. Moving money outside those rules could reduce the benefit or affect the guarantee.

Read the prospectus, contract, and rider disclosures together. List every restriction, including transfer limits, withdrawal rules, income-start requirements, and beneficiary provisions. If any part is unclear, ask a qualified financial professional to explain how the rules may affect your retirement plan.

See how fees affect returns and income

Fees can affect both account growth and future income. Common costs include mortality and expense risk charges, administrative fees, investment management expenses, contract fees, and charges for optional living or death benefits. Surrender charges may apply when you withdraw more than the contract permits during the surrender period.

A contract with several riders can cost more than one without them. Those fees may be reasonable if a benefit addresses an important retirement concern, but compare the cost with the protection provided. Even a small annual percentage can reduce the amount available for withdrawals over time.

Ask for the total annual cost in dollars, not only percentages. Compare projections with and without each rider, and review how fees affect income under different market conditions. Newman Financial Group’s annuity services can provide a starting point for discussing contract costs, guarantees, and your broader retirement strategy.

What Fees and Charges Does a Variable Annuity Have?

Variable annuities can combine tax-deferred investing with insurance features, but those benefits come with several potential costs. Depending on the contract, you may pay for investment management, insurance guarantees, administrative services, optional riders, and early withdrawals. Some charges appear as annual percentages, while others apply only when you withdraw money, transfer funds, or end the contract.

Fees can vary significantly from one contract to another. A lower annual contract fee does not always mean a lower-cost annuity if the investment subaccounts or benefit riders are expensive. Before purchasing, review the contract, prospectus, and rider disclosures. The SEC’s investor guidance on variable annuities explains why investors should examine expenses, surrender periods, and available benefits.

Pay mortality and expense risk charges

Mortality and expense risk charges help cover the insurance protections included in a variable annuity. The mortality portion generally supports the insurer’s promise to provide a death benefit. The expense portion helps compensate the insurer for administrative costs and certain financial risks it assumes under the contract.

These charges are often calculated as a percentage of your account value and deducted over time. The charge may continue even when your investment subaccounts lose value. Ask how the fee is calculated, whether it can change, and which guarantees it supports. You should also find out whether the charge applies during both the accumulation phase and the income phase.

Cover investment subaccount expenses

Your premiums are typically allocated among investment subaccounts that resemble mutual funds. Each subaccount has operating expenses for portfolio management, recordkeeping, and other investment services. These costs are usually deducted from investment returns, so you may not receive a separate bill.

Review the available investment choices and their expense ratios before selecting a contract. Similar investment strategies can have different costs, and higher expenses can reduce your account’s long-term growth. Check whether the annuity limits your investment choices or requires specific allocations to maintain a benefit rider. Annuity.org’s explanation of variable annuity fees provides additional information about how subaccount expenses affect results.

Review administrative, contract, and transaction fees

Administrative fees cover services such as maintaining records, sending statements, and processing account transactions. A contract may charge an annual fee, a percentage of the account value, or a flat amount. Some insurers waive the fee when your account reaches a specified balance.

You may also pay for certain account changes, withdrawals, payment elections, or other requests. Ask for a complete list of administrative and transaction fees, not only the standard annual charge. Confirm whether each fee is a dollar amount or percentage, when it is deducted, and whether the insurer can change it. These details help you estimate the contract’s actual cost.

Pay for living- and death-benefit riders

Optional riders may provide features such as guaranteed lifetime income, enhanced death benefits, or protection against certain market losses. These features can support specific retirement goals, but each rider typically adds a separate charge. The cost may be based on your account value or on a benefit base that is different from the amount available for withdrawal.

Review each rider’s waiting periods, withdrawal rules, investment requirements, and limits. Ask what happens if you change allocations, take larger withdrawals, or cancel the rider. A retirement-income review, such as Newman Financial Group’s Retirement Safeguard program, can help you consider rider costs alongside income, beneficiary, and asset-protection goals.

Account for surrender charges, sales loads, and premium taxes

A surrender charge may apply if you withdraw more than the contract’s permitted amount or end the annuity during its surrender period. The charge often starts higher and declines over several years, although the schedule depends on the contract. This can make early access to your money costly.

Some variable annuities may also include sales loads or distribution-related charges. State premium taxes may apply as well, depending on the contract and applicable state rules. Ask for the complete surrender schedule and calculate how much you could receive if you needed to leave the annuity in each year. Consider whether you may need the funds for health care, family support, or other expenses before the surrender period ends.

Check transfer limits and withdrawal fees

A variable annuity may limit how often you can move money between investment subaccounts. The contract may allow a certain number of transfers without charge, then impose a fee or restrict additional transfers. Some contracts also have special rules for moving money away from an investment option connected to a benefit rider.

Withdrawals can create costs beyond surrender charges. A withdrawal may reduce guaranteed benefits, trigger tax consequences, or lower a rider’s benefit base. Before taking money out, ask how the transaction affects your income guarantee, death benefit, and remaining account value. Read the free-withdrawal provisions carefully, including any percentage limits and timing requirements.

Compare total costs in the prospectus

The prospectus explains the variable annuity’s investment options, fees, risks, and benefit features. Use it to review mortality and expense charges, subaccount expenses, administrative fees, rider costs, surrender charges, and transaction fees. Compare the combined cost rather than considering each charge separately.

Ask for an illustration showing how fees could affect account values and income over time. Confirm whether the illustration includes market returns, withdrawals, rider costs, and contract changes. Then compare the variable annuity with other retirement-income options, including fixed annuities and multi-year guaranteed annuities. A qualified financial professional can help you decide whether the contract’s potential benefits justify its total cost.

How Do You Pay Taxes on a Variable Annuity?

Variable annuities generally allow investment gains to grow tax-deferred. You do not pay federal income tax on those gains while they remain in the contract. Taxes typically apply when you withdraw money, receive annuity payments, exchange the contract, complete a Roth conversion, or receive proceeds as a beneficiary.

Your tax treatment depends on several factors, including whether the annuity is qualified or nonqualified, how much you contributed, when you take distributions, and whether you annuitize the contract. Qualified annuities are usually funded with pretax retirement dollars, while nonqualified annuities are generally funded with money that has already been taxed.

Because annuity taxation combines insurance rules with retirement-account rules, a transaction that appears simple can have lasting consequences. The SEC’s guide to variable annuities explains the basic tax treatment, but personalized advice can help you account for your contract, income, and retirement goals.

Track contributions, cost basis, and tax-deferred growth

For a nonqualified variable annuity, your cost basis generally includes the after-tax money you contributed. The contract’s investment gains can grow without current income tax, but tax deferral does not make those gains permanently tax-free. You may owe ordinary income tax when you take taxable distributions.

Keep records of contributions, withdrawals, exchanges, and any earlier distributions. These details help show how much of the contract represents your original investment and how much represents earnings. Your insurer may provide tax forms, but reviewing them against your own records can help identify errors.

Qualified annuities follow different rules because contributions generally received a tax benefit before entering the contract. Review the IRS rules on annuity distributions with your tax professional.

Pay ordinary income tax on earnings-first withdrawals

Withdrawals from a nonqualified annuity generally follow an earnings-first rule. In practice, the taxable investment growth comes out before your original contributions. The earnings portion is usually taxed as ordinary income, rather than at capital gains rates.

For example, if you contributed $50,000 and the contract is worth $65,000, the first $15,000 withdrawn may be treated as taxable earnings. Once those earnings have been distributed, later withdrawals may represent your after-tax contributions. The exact treatment can depend on the contract and distribution method.

Partial withdrawals, full surrenders, and scheduled payments may each create different tax and fee consequences. Before requesting money, ask the insurer how it will report the transaction. Investor.gov explains variable annuity withdrawals and the earnings-first rule.

Handle qualified annuities, rollovers, and required distributions

A qualified variable annuity is held inside a tax-advantaged retirement account, such as a traditional IRA or eligible employer plan. Because contributions generally have not been taxed, distributions are usually included in your taxable income. A properly completed rollover can preserve tax-deferred treatment.

A direct rollover typically moves retirement funds from one institution to another without paying the money to you first. If the funds are distributed to you, timing and withholding rules may apply. A mistake can make part of the transaction taxable.

Required minimum distributions may also apply once you reach the applicable starting age, even if your money remains inside an annuity. Review your contract, other retirement accounts, and current IRS rollover guidance before moving funds.

Understand early distributions before age 59½

A taxable variable annuity distribution taken before age 59½ may result in an additional 10% federal tax penalty. The penalty generally applies to the taxable portion of the withdrawal, and regular income tax may apply as well.

Certain exceptions can reduce or eliminate the penalty, including some disability, death, substantially equal periodic payment, and qualifying medical expense situations. Each exception has specific requirements, so do not assume a withdrawal qualifies without confirming the details.

Surrender charges, withdrawal limits, and market value adjustments can further reduce the amount you receive. If you need retirement funds early, compare the possible tax penalty with the contract’s other costs. The IRS explains early distribution penalties and common exceptions.

Apply the exclusion ratio after annuitization

When you annuitize a nonqualified variable annuity, the insurer converts the contract value into a series of payments. Each payment may include a taxable earnings portion and a nontaxable return of your original investment. The exclusion ratio determines how much of each payment is excluded from taxable income.

The calculation generally considers your investment in the contract and the expected return under the selected payout option. After you recover your investment, later payments may be fully taxable. Qualified annuity payments are generally taxed differently because the account was funded with pretax money.

Annuitization can also affect liquidity, beneficiary payments, and the amount of income you receive. Ask the insurer for a written payment illustration and tax explanation before choosing a payout option. The IRS publication on pensions and annuities provides additional information about the exclusion ratio.

Use 1035 exchanges and direct rollovers correctly

A Section 1035 exchange may allow you to transfer funds from one annuity to another without recognizing current income, provided the transaction meets federal requirements. The exchange generally needs to be structured as a qualifying transfer, rather than a withdrawal paid to you and then reinvested.

Avoid assuming that a tax-free exchange is automatically a suitable exchange. The new contract may have a fresh surrender period, different fees, new investment options, or limits on living and death benefits. It could also provide fewer features than your existing contract.

A direct rollover serves a different purpose. It generally transfers eligible retirement funds between qualified plans or accounts while preserving tax-deferred treatment. Review the IRS rules for tax-free exchanges, and compare both contracts before signing transfer paperwork.

Consider the tax impact of Roth conversions

Converting a traditional qualified variable annuity to a Roth IRA can create taxable income. Generally, the converted amount, less any eligible after-tax basis, is included in your income for the year of conversion. A large conversion may affect your tax bracket and other income-related costs.

After a valid Roth conversion, qualified Roth IRA distributions can generally be tax-free. Roth IRAs also do not follow the same lifetime required minimum distribution rules as traditional IRAs. However, a conversion does not remove surrender charges, investment risk, contract restrictions, or annuity expenses.

You may complete a conversion all at once or in stages, depending on your income, tax bracket, and retirement plan. Estimate the tax bill first and decide how you will pay it. The IRS information on Roth IRAs explains the basic rules, while a tax professional can assess your situation.

Plan beneficiary and inherited-contract taxes

When a variable annuity owner dies, the beneficiary may receive a death benefit based on the contract terms. The tax treatment can depend on the contract’s value, the owner’s contributions, whether the annuity was annuitized, and how the beneficiary receives the money.

For a nonqualified annuity, previously untaxed earnings are generally taxable to the beneficiary when distributed. A surviving spouse may have additional options under applicable rules. Nonspouse beneficiaries may face different distribution deadlines and payment choices.

Review your beneficiary designation after marriage, divorce, a death in the family, or another major change. Coordinate it with your estate plan and other retirement accounts. Ask the insurer how each payout option affects taxes, and review the IRS beneficiary guidance when the annuity is held in a retirement account.

Coordinate tax decisions with a qualified professional

Variable annuity taxation depends on the contract, account type, distribution history, and transaction you are considering. A financial professional can help you compare income and investment choices. A certified public accountant or tax attorney can address reporting requirements and potential tax liabilities.

Before taking action, gather the contract, recent statements, contribution records, beneficiary information, and prior tax forms. Ask for a written explanation of the tax treatment, surrender charges, withdrawal impact, and available alternatives. This preparation can help you spot potential problems before a transaction becomes permanent.

Newman Financial Group can review how an annuity fits within your broader retirement plan, including income, tax, beneficiary, and long-term-care considerations. Request a personalized Retirement Safeguard review, and include your tax professional in decisions that may create taxable income.

How Does a Variable Annuity Compare With a Fixed Annuity or MYGA?

Variable annuities, fixed annuities, and multi-year guaranteed annuities (MYGAs) can all play a role in retirement planning, but they are designed for different priorities. A variable annuity places your money in investment subaccounts, so its value can rise or fall with market performance. A fixed annuity credits interest according to its contract terms, while a MYGA typically guarantees a stated interest rate for a set number of years.

The right choice depends on the role you want the money to play. You may prioritize market growth, predictable accumulation, protected principal, lifetime income, or access to your savings. Your time horizon, risk tolerance, tax situation, and other retirement income sources matter, too.

No annuity guarantees every outcome. Fixed interest and income guarantees depend on the issuing insurance company’s claims-paying ability, and contract provisions can limit withdrawals or affect benefits. Compare each product’s features, costs, and restrictions before making a decision.

Compare investment subaccounts with declared interest

A variable annuity gives you a selection of investment subaccounts that may hold stock, bond, or blended portfolios. These options can resemble mutual funds, but they are held inside an insurance contract. Your account value depends on the performance of the subaccounts you select, minus applicable fees and expenses. You may also be able to change your allocations as your goals or comfort with market risk change.

A fixed annuity generally does not depend directly on stock market performance. Instead, the insurer credits interest based on the contract. A MYGA is a type of fixed annuity that typically provides a guaranteed interest rate for a defined period. Annuity.org explains how variable and fixed annuities differ, including the contrast between market-based subaccounts and declared interest.

This difference affects both growth potential and predictability. A variable annuity offers more investment choice, while a fixed annuity or MYGA may be simpler to understand and monitor.

Weigh growth potential, principal risk, and guarantees

Variable annuities may offer greater long-term growth potential because they provide exposure to market investments. That opportunity comes with market risk. If the subaccounts lose value, your annuity value may decline as well. Unless a specific contract feature or rider offers protection, your principal is not protected from investment losses.

Fixed annuities and MYGAs generally provide more predictable interest crediting and may protect the contract value from market declines, subject to the contract and the insurer’s financial strength. This can suit money earmarked for a specific retirement period. The tradeoff is that you may receive less growth if markets perform strongly.

Not all guarantees work the same way. A guaranteed interest rate, minimum contract value, income benefit, and death benefit each have separate rules. Investor.gov’s variable annuity guidance recommends reviewing the contract to confirm what is guaranteed, who provides the guarantee, and what conditions apply.

Compare fixed annuity and MYGA rates, terms, and accumulation

A fixed annuity may offer an initial declared rate, followed by rates set under the contract. A MYGA generally provides a stated rate that remains in place for a defined term. This structure can make a MYGA relatively straightforward to compare with a certificate of deposit, although the products have different tax treatment, withdrawal rules, and protections.

Look beyond the advertised rate. Review the guarantee period, minimum premium, renewal terms, surrender schedule, withdrawal provisions, and what happens when the term ends. A higher rate may not suit you if accessing the money before the term ends could result in charges or other adjustments.

Accumulation is only one part of the decision. A variable annuity may offer more growth potential but less certainty about the account value. A MYGA may provide steadier accumulation, but its fixed rate may not keep pace with inflation over a long retirement. Newman Financial Group’s annuity services can help you compare contract features with your broader retirement plan.

Assess income options, inflation, and liquidity

Each type of annuity may be used to create retirement income, but the amount and predictability depend on the contract. A fixed annuity or MYGA may provide a clearer income estimate when payments are based on a guaranteed rate. A variable annuity can also be annuitized, but payments may depend on investment performance, the payment option selected, and other contract terms.

Inflation deserves careful attention. A fixed payment may cover less of your expenses as prices increase. Some variable annuities offer riders designed to provide income increases or other protections, but these features may add fees and restrictions. Ask whether the income is fixed, adjustable, or connected to an investment value.

Liquidity matters, too. Annuities may permit limited withdrawals, but taking out more than the contract allows during a surrender period can result in charges. A variable annuity may also be a poor fit for short-term needs because its value can fluctuate. Keep emergency savings and near-term spending money separate from assets intended for long-term income.

Compare fees, surrender periods, and flexibility

Variable annuities often have more layers of fees than fixed annuities and MYGAs. Costs may include mortality and expense risk charges, administrative fees, investment subaccount expenses, and charges for optional income or death-benefit riders. These expenses reduce your account value and may affect the income your savings can provide.

Fixed annuities and MYGAs often have simpler fee structures, but they are not cost-free. Contracts may include surrender charges, withdrawal limits, market value adjustments, or other provisions that affect access to your money. Rates may also vary based on the premium amount, term length, or withdrawal options.

Flexibility can come with a cost. A variable annuity may let you select and change subaccounts, while a MYGA may involve fewer investment decisions in exchange for a stated rate. Read the prospectus and contract instead of relying only on a summary or illustration. The SEC’s investor resources on variable annuities explain common fees, risks, and surrender charges.

Compare variable annuities with brokerage accounts and retirement plans

A variable annuity combines market investing with insurance features. It may provide tax-deferred growth, a death benefit, or optional lifetime-income benefits. A regular brokerage account usually offers greater liquidity and a wider range of investments, but it does not automatically provide an insurance-based income guarantee. Its earnings and realized gains may also receive different tax treatment.

Retirement accounts, including 401(k)s and IRAs, may offer tax advantages and, in some cases, employer contributions. Investment choices and distribution rules depend on the account or plan. An annuity held inside a retirement account does not create an additional tax-deferral benefit, because the account may already receive that treatment. Its value would need to come from the insurance features and income options.

Review the details before moving money from an IRA or 401(k) into an annuity. Compare expenses, surrender provisions, tax consequences, creditor protections, income guarantees, and beneficiary rules. Newman Financial Group offers guidance on 401(k) and IRA rollovers as part of a broader retirement-income strategy.

Match the annuity type to your retirement goal

A variable annuity may be worth considering if you have a longer time horizon, can accept market fluctuations, and value investment choice or optional income features. It may be less suitable for money you expect to spend soon or for someone who prefers not to see account values change with the market.

A fixed annuity or MYGA may fit better when predictable accumulation and protection from market declines are higher priorities. A MYGA can be considered for a portion of retirement savings you do not expect to use during its guarantee period. Even then, compare its rate and term with your expected income needs, inflation concerns, and access requirements.

Many retirement strategies combine several tools rather than relying on one product. Consider Social Security, pensions, investment accounts, insurance coverage, taxes, and long-term-care needs together. A personalized Retirement Safeguard review can help you assess whether an annuity fits alongside the rest of your retirement plan.

How Do You Evaluate a Variable Annuity for Retirement?

A variable annuity may offer tax-deferred growth, market exposure, and optional income guarantees, but it is not automatically the right choice for every retirement plan. Start with your broader financial picture rather than focusing on a projected return or a single contract feature.

Review the annuity’s investments, fees, withdrawal rules, tax treatment, guarantees, and insurer strength together. Then compare it with alternatives such as a fixed annuity, MYGA, IRA, or brokerage account. Newman Financial Group’s retirement planning services can help connect these decisions to your income needs and long-term goals.

Identify your retirement income gap

Estimate your monthly retirement expenses, including housing, health care, insurance, taxes, travel, and potential long-term-care costs. Next, list dependable income sources such as Social Security, pensions, rental income, and existing annuity payments.

The difference between your expected expenses and reliable income is your retirement income gap. A variable annuity may help address part of that gap through withdrawals or a lifetime-income feature, depending on the contract. However, the SEC’s guidance on variable annuities explains that these products are intended for long-term goals, not short-term needs.

Build your estimate around several scenarios, including inflation, market losses, increased medical expenses, and a longer-than-expected retirement. This gives you a more practical basis for deciding whether guaranteed income is needed and how much of your savings should support it.

Match market exposure to your time horizon and risk tolerance

Variable annuities generally invest premiums in subaccounts that may hold stocks, bonds, or other investments. These investments provide market exposure and growth potential, but the account value can rise or fall. Consider how long it will be before you need the money and how much loss you could tolerate without changing your retirement plans.

Your risk tolerance includes more than your reaction to daily market changes. Ask whether you could stay invested during a downturn, especially if you are already taking withdrawals. MassMutual’s explanation of variable annuities describes their market-based investment options, but each contract has its own subaccounts, fees, and restrictions.

Review the available investments carefully. A long time horizon may support more market exposure, while someone nearing retirement may need to limit volatility around planned withdrawals. Your allocation should reflect both your goals and your ability to withstand losses.

Separate retirement assets from emergency funds

Keep your emergency savings outside a variable annuity. You may need cash for a medical bill, home repair, family expense, or temporary income disruption. Surrender charges, withdrawal limits, and market losses could make annuity funds less convenient to access when you need them quickly.

Set aside an appropriate reserve in an account designed for liquidity before committing money to a long-term contract. Some annuities permit penalty-free withdrawals up to a stated percentage, but that provision may not eliminate taxes, contract charges, or investment losses. Annuity.org’s overview of annuity liquidity explains why withdrawal rules deserve close attention.

Ask how the contract handles withdrawals during the surrender period, after income payments begin, and when a rider is active. Also confirm whether taking money out could reduce future income benefits or affect a death benefit.

Review 401(k), IRA, Roth, and other income sources

Evaluate a variable annuity alongside every account and income source you already have. Review your 401(k), traditional IRA, Roth IRA, pension, Social Security, bank accounts, investments, and existing insurance products. This inventory can show whether you have a genuine income gap or already have enough dependable income.

Consider how withdrawals will work across account types. Taxable accounts, tax-deferred accounts, and Roth accounts may each play a different role over time. The order and timing of withdrawals can affect taxes, investment risk, and the amount available to a surviving spouse.

A variable annuity with a lifetime-income feature may be useful when you have a persistent income gap. It could add unnecessary cost and complexity if you are still building savings or already have sufficient guaranteed income. Review your full retirement plan before transferring money into a new contract.

Consider qualified and nonqualified tax treatment

Determine whether the annuity would be funded with retirement-plan assets or money from a taxable account. A qualified annuity is held within a tax-advantaged retirement account, such as an IRA. A nonqualified annuity is funded with after-tax money and may provide tax-deferred growth on its earnings.

Tax treatment affects withdrawals, required minimum distributions, beneficiary planning, and rollover decisions. For a nonqualified contract, withdrawals generally come from earnings first and are taxed as ordinary income until those earnings have been distributed. Qualified contracts follow the rules of the retirement account that holds them.

The Cornell Legal Information Institute’s variable annuity overview provides general background, but tax rules can vary based on the account type, owner, beneficiary, and transaction. Ask a qualified tax professional to review the proposed funding method before you proceed.

Evaluate each rider’s cost, benefits, and limits

Optional riders may provide guaranteed lifetime income, enhanced death benefits, or protection tied to a benefit base. These features can be valuable, but they add costs. Charges may reduce your account value, investment return, or available income.

Read how each rider defines its benefit base, withdrawal percentage, eligible investments, and activation requirements. A guaranteed income amount may not equal your account value, and withdrawals above the permitted amount could reduce future benefits. Ask what happens if you change investments, stop contributions, cancel the rider, or take money out early.

Also clarify whether the rider guarantee applies for life, for a set period, or only under specific conditions. Protective Life’s variable annuity guidance recommends reviewing the contract’s charges, risks, investment options, and optional benefits before investing.

Coordinate income, beneficiary, insurance, and long-term-care plans

A variable annuity should fit with your estate and protection plans rather than operate separately from them. Review who owns the contract, who receives the death benefit, and how withdrawals or annuitization may affect beneficiaries. Once a contract is annuitized, the available beneficiary options may differ from those available during the accumulation phase.

Then consider life insurance and long-term-care coverage. You may need one strategy for monthly retirement income, another for a spouse’s protection, and a separate plan for future care expenses. A variable annuity’s death benefit may support legacy goals, but it comes with specific charges, conditions, and limitations.

Newman Financial Group’s Retirement Safeguard program brings income, asset protection, and long-term planning questions into one review. This type of coordinated approach can help identify gaps before you commit to a contract.

Check the insurer’s financial strength and claims-paying ability

Guarantees in a variable annuity depend on the issuing insurer’s ability to meet its contractual obligations. They do not protect you from market losses, and they are not backed by FDIC insurance. Before purchasing, review the insurer’s financial strength ratings from independent agencies such as AM Best, Moody’s, and Standard & Poor’s.

Confirm which company issues each guarantee and read the contract to see how that guarantee works. You should also ask whether state guaranty association coverage may apply if an insurer fails, as eligibility and limits vary by state and product.

Ratings can change, so they should be one part of your review rather than the only factor. Annuity.org recommends reviewing an insurer’s financial strength rating before buying. Ask for current ratings, read the insurer’s disclosures, and identify which benefits are contractual and which depend on investment performance.

What Should You Do Before Buying a Variable Annuity?

A variable annuity may combine market-based investment options with insurance features, but its contract can be difficult to evaluate at a glance. Before you commit, review the details, compare alternatives, and consider how the annuity would fit into your broader retirement plan. The right questions can help you understand the potential benefits, costs, risks, and restrictions before you send money.

Read the prospectus, contract, and rider disclosures

Begin with the variable annuity’s prospectus. It outlines the investment options, objectives, risks, charges, and expenses. Read the insurance contract and each rider disclosure as well. A rider may provide an income guarantee or enhanced death benefit, but it can also add fees, conditions, and limits.

Pay attention to how benefits are calculated, when they begin, and what could cause them to change. Ask the financial professional to explain unfamiliar terms in plain language. The SEC’s Investor.gov guide to variable annuities can also help you understand common features and risks. Do not rely on a summary alone. Request the full documents and read them before making a decision.

Compare alternatives and calculate total-cost impact

Review the variable annuity alongside other options that may serve the same purpose. Depending on your goals, those options could include a brokerage account, traditional IRA, Roth IRA, fixed annuity, or multi-year guaranteed annuity. Compare each choice based on growth potential, taxes, guarantees, access to funds, and investment flexibility.

Next, estimate the total cost over the period you expect to own the contract. Include mortality and expense charges, administrative fees, investment expenses, rider costs, sales charges, and possible surrender charges. Consider how these expenses could affect your account value and future income. Variable annuities are generally designed for long-term goals, and early withdrawals may involve taxes and surrender charges, as Investor.gov explains.

Ask about guarantees, fees, withdrawals, and surrender charges

Ask for a written explanation of every guarantee included in the contract. Find out whether the guarantee applies to your account value, income base, death benefit, or another figure. Ask which insurance company provides it and what circumstances could reduce, suspend, or end the benefit. An insurance guarantee depends on the issuing insurer’s ability to meet its obligations.

You should also understand how withdrawals work. Ask how much you can take out without a surrender charge, whether withdrawals reduce future income benefits, and how fees are deducted. Confirm the length of the surrender period and the charges that apply during each year. These details are important if you may need money for medical care, home repairs, or other unplanned expenses. A contract that looks suitable for retirement income may be less suitable if you need frequent access to your savings.

Understand advisor compensation and contract suitability

Ask how the financial professional is compensated. Payment may come through a commission, an ongoing advisory fee, or another arrangement. Compensation does not automatically determine whether a variable annuity is suitable, but understanding the arrangement gives you a clearer picture of the recommendation. Ask what services are included and whether you will pay ongoing fees after the purchase.

Share a complete view of your financial situation, including your age, income needs, tax circumstances, other investments, emergency savings, and expected retirement expenses. The recommendation should reflect your time horizon and comfort with market losses. You can review a broker’s professional background through FINRA BrokerCheck. If questions remain, ask for the recommendation and its reasoning in writing so you can review it at your own pace.

Create a distribution and beneficiary strategy

Decide how the annuity could support your retirement income before you purchase it. You might use it to cover part of your essential expenses, combine withdrawals with Social Security and other income, or annuitize some or all of the contract later. Ask how each approach could affect your account value, income benefits, taxes, and access to money.

Review the beneficiary provisions carefully. A death benefit may depend on the contract value, purchase payments, market performance, or a selected rider. Name primary and contingent beneficiaries, then revisit those designations after marriage, divorce, a death in the family, or another major change. Coordinate the annuity with your retirement income services, estate planning documents, and long-term-care strategy. A clear distribution plan can help reduce confusion for you and your family.

Request a personalized Retirement Safeguard review from Newman Financial Group

A personal review can help you decide whether a variable annuity belongs in your overall retirement strategy. Newman Financial Group’s Retirement Safeguard program considers retirement income needs, asset protection, and risks that may affect your plans. Bring current account statements, expected expenses, insurance information, and questions about taxes, withdrawals, or beneficiaries.

A consultation does not replace the need to read the contract or seek qualified tax and legal advice. It gives you an opportunity to discuss your priorities with a retirement-focused professional and compare potential solutions. Newman Financial Group has helped clients develop tailored retirement strategies since 1991 and offers a free consultation for those who want to review their options before making a long-term decision.

Frequently Asked Questions

Is a variable annuity a good choice for retirement?
It may be appropriate for someone seeking tax-deferred growth, market-based investment options, or guaranteed income features. However, it may not suit short-term savings, emergency funds, or investors who are uncomfortable with market losses and long surrender periods. Compare it with fixed annuities, MYGAs, IRAs, 401(k)s, and brokerage accounts before deciding.

Can you lose money in a variable annuity?
Yes. The investment subaccounts can lose value when the markets decline. Optional riders may protect a specific income or death benefit, but they typically do not protect your entire account balance. The contract explains which benefits are guaranteed and which depend on investment performance.

What taxes apply when you withdraw money from a variable annuity?
Nonqualified annuity withdrawals generally distribute taxable earnings first, and those earnings are usually taxed as ordinary income. Qualified annuities follow the tax rules of the retirement account holding them. Withdrawals before age 59½ may also face an additional federal tax unless an exception applies.

How much do variable annuities cost?
Costs may include investment expenses, mortality and expense charges, administrative fees, rider charges, sales charges, and surrender fees. Request the total annual cost in both percentage and dollar terms. Also ask how fees affect account value, income guarantees, and the amount beneficiaries may receive.

What should you review before buying a variable annuity?
Read the prospectus, insurance contract, and rider disclosures. Confirm the investment choices, fees, surrender schedule, withdrawal limits, tax treatment, income options, beneficiary rules, and the insurer’s financial strength. A personalized review with Newman Financial Group can help you compare the contract with your full retirement-income and asset-protection plan.

Sam Newman