As an amateur investor/advisor I’m always looking at the pros and cons of each type of investment. Today, I want to give you my thoughts on variable annuities. Before we get started, let me assure that you know the difference. Fixed annuities are tied to interest rates or indexed annuities tied to various indexes and variable are tied to the investment performance of the mutual funds within the policy. That means you COULD make much more but then again, you could make much less too!

The Pros:

1. Flexibility investment choices – Variable annuities have sub-accounts with various mutual funds to select from. This makes it easy to change investment direction or your allocations with little or no costs.

2. Tax deferral for your investment gains – Just like your 401k or IRA, in variable annuities your contributions and earnings can grow tax-deferred until you withdraw funds. If this is in a non-qualified account (non IRA or retirement), you do not have to make mandatory withdrawals at age 70 1/2.

3. Income for life – I will concede that no other investment allows for the creation of income for life. Once you select monthly payments (or annuitize) your annuity contract, the insurance company will guarantee you (and your spouse, should you desire) the income payment for the rest of your life. This is like creating your very own pension! Gotta love that variable annuities pro!

The Cons

1. Irreversible consequences. The idea of income for life sounds enticing but here are a few cons. For example, once you invest in your variable annuity it often becomes irreversible. You often give up the ability to get your lump sum back or even pass it to “other beneficiaries”. So, choose wisely!

2. Locked up until 59 1/2. Another downside is that once you put funds into an variable annuity you cannot touch those funds until you reach age 59.5. Otherwise you have to pay a 10% penalty for early withdrawals. Yuck!

3. Poor tax planning. A withdrawal from a variable annuity is treated as ordinary income rather than qualifying for the often more favorable long-term capital gains treatment. When you do start to take funds from the contract, the portion of your payments that are considered investment gains are taxed at your ordinary income tax rate instead of the long-term capital rates. This rate could be higher than the current capital gains rate.

There you have it, variable annuities have both pros and cons and you need to talk to a professional to find out what is right for your situation. In fact, it’s better to get options from MULTIPLE professionals to compare rates and programs. That is why I’ve teamed up with a private company that seeks out the best quotes and gives them to you – free of charge. I hope you give it a try!