An annuity that provides the annuitant a small guaranteed return for the life of the annuity along with another return that depends on the performance of a portfolio. Like any annuity, the annuitant buys into a policy, either with a lump sum or premiums over a period of time. When the annuitant reaches a certain age or retirement (whichever is greater), he/she begins to receive payments. Generally speaking, the insurance company issuing a variable annuity invests the premiums in investment vehicles such as stocks or mutual funds. This exposes the annuitant to the risk that he/she will be stuck with a smaller return, but it also carries the possibility of a much larger return. See also: Fixed annuity .
An annuity with payments to the annuitant that vary depending upon the investment success of a separate investment account underlying the annuity. Because the invested funds are primarily in common stock, this annuity offers greater potential rewards and greater attendant risks than annuities supported by fixed-income securities. Compare fixed annuity. See also hybrid annuity .
A variable annuity is an insurance company product designed to allow you to accumulate retirement savings.
When you purchase a variable annuity, either with a lump sum
or over time, you allocate the premiums you pay among the various separate account funds offered in your annuity contract.
The tax-deferred return on your variable annuity fluctuates with the performance of the underlying investments in your separate account funds, sometimes called investment portfolios or subaccounts.
You may purchase qualified variable annuities, which are offered as options within an employer sponsored retirement savings plan, or nonqualified variable annuities. Nonqualified annuities are those you purchase on your own, often to supplement other retirement savings.
You can also choose an individual retirement annuity, which resembles an individual retirement account except that the underlying investments are separate account funds.
Among the appeals of both qualified and nonqualified variable annuities are the promise of a stream of income for life if you annuitize the assets in your account and the right to make tax-exempt transfers among separate account funds.
If you purchase a nonqualified annuity, there are no federal limits on the annual amounts you can invest, no requirement that you purchase the annuity with earned income, and no minimum required withdrawals beginning at age 70 1/2.
However, with both types of variable annuities, withdrawals before you reach age 59 1/2 may be subject to a 10% early withdrawal tax penalty.