What Are Variable Annuities?

Variable annuities are a form of insurance. They combine elements of investing with traditional annuity insurance. This insurance provides a basic guarantee of income designed specifically for retirement by converting a savings to guaranteed monthly payments. During your working years, you deposit money with the insurance company. The company establishes an account for you. This account is linked to your annuity contract and the savings is invested into mutual funds. The inherent fluctuations in your variable annuity, due to the mutual fund investments, allow you to earn more than a fixed interest investment, but you may also earn less. [134]

Withdrawal Options

Periodic Withdrawal

Variable annuities offer a couple of withdrawal options. Your first option is a periodic withdrawal. This withdrawal option gives you the right to take as much money as you want or need from the contract. You can make one or several withdrawals based on your financial goals and income needs.

Many life insurance companies impose surrender charges, so you should watch out for these. Surrender charges are penalties charged by an insurer for withdrawing money from the annuity prior to the date listed in the policy contract.

Your surrender penalty obviously affects how much money you have available to spend. But, insurers do not penalize the entire amount. Normally, a 10 or 20 pecent withdrawal is allowed as a "free withdrawal."

While this withdrawal is free from the insurer, the IRS is less forgiving. The IRS, unfortunately, penalizes withdrawals from all variable annuities prior to your age 59 1/2. This is because the IRS deems these contracts retirement accounts.

Systematic Withdrawal

Systematic withrawals are withdrawals which occur systematically, as the name suggests. you set up a withdrawal which takes place over a specific period of time. You only need to elect this payment modality once, and the insurance company makes sure that you receive the payment each and every pay period.

The standard pay period is one month. This means a systematic payment would give you monthly income until you elect to stop such payments.  Like the periodic withdrawal, the systematic payments are subject to surrender charges and IRS penalties.[134]


Annuitization is a process of converting your annuity savings to monthly payments. This gives you the highest withdrawal amount possible from the contract, but you can no longer access the savings in your policy. Instead, the insurance company guarantees your payments for a set number of years. You choose the length of time you receive payments. You may choose temporary payments ranging from 5 to 20 or more years or you may elect lifetime payments which continue regardless of how long you live.[134]

Tax Consequences Of Variable Annuities After Age 70 1/2

 All withdrawals from variable annuities are taxed at ordinary income tax rates. however, only investment earnings are taxed. Contribution amounts are not taxed, with one exception.


Qualified Annuities

Variable annuities are subject to provisions which make them less accessible when they are housed in a retirement account. Annuities purchased as part of a 403(b) retirement plan, an IRA  and even as part of an employer pension are taxed on 100 percent of the amount distributed to you.

This is because all contributions are made on a pretax or tax-deductible basis. This, in turn, also means that they are subject to IRS required minimum withdrawal rules. IRS withdrawal rules stipulate that withdrawals must commence at your age 70 1/2. Withdrawals are made according to the required minimum distribution rules outlined in table III of IRS publication 590.

If you fail to take distributions according to the table in publication 590, then the IRS will assess a horrific 50 percent penalty on the amount you should have withdrawn, but did not. [135]