A Plan for Your Future
If you’re seeking to secure your financial future beyond your working years, you have many options for saving and investing your money. But when it comes to long-term planning, certain investments let you save on a tax-deferred basis.
Combine tax deferral with the long-term growth potential inherent in stock and bond investments and you have an alternative that can help you build the retirement assets you’ll need – a variable annuity.
Variable annuities offer a remarkable combination of tax-advantaged growth opportunities and protection including:
- Tax deferral. You pay no current income tax on earnings or other taxable amounts until you make a withdrawal. At that time, withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply.1
- Potential for long-term growth of your money through professionally managed investment portfolios.
- Valuable guarantees. These include protection for beneficiaries and choices for income you cannot outlive.
1 Tax-qualified contracts such as IRAs, 401(k)s and others are tax-deferred regardless of whether they are funded with an annuity.
What is a Variable Annuity?
A variable annuity is a contract between you – the annuity owner – and a life insurance company. In return for your purchase payment, the insurance company agrees to provide either a regular stream of income or a lump-sum payout at some future time, generally when you retire.
How Does it Work?
A variable annuity has an accumulation phase and an income phase. The accumulation phase begins as soon as you invest. Your purchase payment(s) can be invested in the securities portfolios and fixed-interest options available in your contract. Unlike a mutual fund, where interest, dividends and/or capital gains are taxed each year, any growth in an annuity accumulates on a tax-deferred basis. Of course, your investment can also lose value.
When you are ready to take distributions, typically at retirement, you can choose to have your principal and interest paid out in the form of income payments – called annuitization – or you can take systematic withdrawals or receive a lump-sum payout.
What Do I Receive for my Purchase Payments?
For each purchase payment you make, you receive “accumulation units” in the insurance company’s separate account. The separate account purchases shares in professionally managed investment portfolios. Performance depends on the portfolios you’ve chosen, not on the insurance company’s general assets. Each unit’s value (or “price”) is determined by the portfolio’s value, less any insurance charges, divided by the number of units outstanding.
Some annuities may credit investors with payment enhancements; in exchange, you usually accept a higher surrender charge and/or a longer withdrawal period. See the annuity’s prospectus for details.
How Will Tax Deferral Affect My Investment?
Tax deferral can allow the value of your annuity to potentially grow faster than that of a comparable taxable investment. The illustration below is purely hypothetical and intended to show the power of tax-deferred compounding over time.
Tax-deferred value (assumes compounding without current taxes)
Tax-deferred, value after taxes (upon distribution)
Currently taxable (annual taxes reduce compounding)
Illustrative only; fees, charges, tax rates and actual returns will differ.
This chart does not reflect the fees and charges associated with any particular investment or annuity and is for illustrative purposes only, not a guarantee of future results. Consult your tax advisor for guidance specific to your situation.
What is the Difference in Taxation for Taxable and Tax-Deferred Investments?
In a currently taxable investment, like a mutual fund, any dividends or interest you earn each year are taxable, even if you reinvest them. Capital gains may be taxed at a rate different from ordinary income. In a variable annuity, gains accumulate tax-deferred and are taxed as ordinary income when withdrawn. In general, interest is considered withdrawn first for tax purposes. Withdrawals prior to age 59½ may incur a 10% federal penalty on the taxable portion.
With an annuity, if the contract owner dies the beneficiary will owe income taxes only on the taxable portion of the death benefit. Special rules apply to spousal beneficiaries and to contracts held in qualified plans (IRAs, etc.). Your financial professional can help evaluate your situation.
Why is it Called a “Variable” Annuity?
“Variable” refers to the fact that the contract value and/or income generated by the underlying investment options is not fixed and will vary based on market conditions and prevailing interest rates.
What Types of Securities do the Portfolios Contain?
Most variable annuities let you choose among portfolios of stocks, bonds and money-market alternatives. You can allocate your money among different portfolios depending upon how aggressive or conservative you want to be.
Who Decides Exactly What I Invest In?
You choose the investment options from those offered in your contract. The insurance company issuing the annuity develops relationships with professional investment managers; their mutual funds or series funds will be a part of each investment option. Most variable annuities offer you several different managers so you can diversify within one product.
Why Should I Invest in Securities Through a Variable Annuity?
- Diversification. Access a broad range of investment options, asset classes and styles in a single wrapper.
- Switching privileges. Most contracts let you reallocate among options without current taxation (though a transfer charge may apply).
- Insurance guarantees (subject to the insurer’s claims-paying ability):
- Guaranteed death benefit. Beneficiaries receive at least a stated amount (terms vary by contract and may involve additional cost).
- Fixed-interest options. Many annuities also offer fixed accounts with guaranteed rates.
- Income for life. If you annuitize, you can receive income that lasts as long as you live.
- Minimum guaranteed income. Some contracts include income protection features for retirement.
- Return of principal amount. Certain riders may guarantee a return of premium after a period or via systematic withdrawals.
Features/riders have additional costs, restrictions and holding-period requirements; see the prospectus.
Can I Have Access to My Money Before I’m 59½?
Most variable annuities allow withdrawal of a specified amount during the accumulation phase, free of company-imposed charges. Withdrawals in excess of that amount may trigger surrender charges and are subject to income tax; if taken before age 59½ the IRS may also impose a 10% federal penalty. Some contracts apply a “market value adjustment (MVA)” to fixed-account withdrawals during the interest-rate guarantee period.
What Should I Consider When Selecting a Variable Annuity?
- Historical performance of the portfolios (not a guarantee of future results).
- All fees and charges – mortality & expense, administrative, riders – and available benefits (see prospectus).
- Financial strength and claims-paying ability of the insurer; independent ratings may help inform your decision.
How Can I Find Out Whether an Annuity is Right for Me?
Ask your financial advisor to review your circumstances and determine if an annuity is appropriate. Consider the annuity’s unique advantages:
- Tax deferral
- Professional management
- Diversification
- Retirement income you cannot outlive
- No cap on how much you can invest
- Death benefits
Investors should consider the investment objectives, risks, and charges and expenses of variable annuities carefully before investing. The prospectus contains this and other important information about the variable annuity and its underlying funds. Prospectuses for both the variable annuity contract and the underlying funds are available from your Inter Consultant financial advisor and should be read carefully before investing.
Variable annuities are long-term investments intended for retirement. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges and may reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in the securities underlying variable annuities involves investment risk, including possible loss of principal. Past performance is no guarantee of future results.
The purchase of a variable annuity is not required for, and is not a term of, any banking service or activity. Variable annuities are not federally insured by the FDIC, the Federal Reserve Board or any other government agency and are not a deposit of, guaranteed by, or an obligation of any bank or banking institution.
Not FDIC or NCUA/NCUSIF insured · No bank or credit union guarantee · May lose value
For additional information and the variable annuity prospectus(es) of your choice, please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you.
© 2025 Inter Consultant. All rights reserved.