Annuities: Variable & Fixed

Today we return to the good old topic of everyone's interest: Retirement. Specifically we discuss the topic of tax deferred annuities. For those who are unaware, an annuity is defined as a sum of money payable yearly or at other regular intervals. There are two types of tax-deferred annuities: variable and fixed.

Variable annuities may be appropriate for self directed, growth-oriented investors who do not expect to retire for at least 10 years. Most variable annuities provide a guranteed death benefit up to certain age. They also allow you to invest your money in portfolios of securities that are similar to mutual funds. Your investment returns are based on the performance of the indivitual portfolios you choose, minus fees and expenses.

Variable annuities also provide a number of tax advantages. You can make tax-free exchanges within the annutity. You can also exchange within the annuity. You can also exchange one firm's annuity for another's with no tax consequences (a so-called 1035 exchange). You are not required to file any annual tax forms until you start withdrawing your assets, but taxable amounts withdrawn prior to age 59 1/2 may be subject to a 10% IRS penalty.

Investors with shorter time horizons (typically less than 10 years until retirement) who prefer a guarenteed rate of return may want to consider a deferred fixed annuity as a way to protect their savings from market volatility. Fixed annuity rates are based on the investment time period and are linked to current interest rates. Some investors use them to replace the Guaranteed Investment Contract (GIC) portion af an employer-sponsored saving plan when those assets are rolled over.