Variable annuities and mutual funds are very popular investments. They both offer the average investor the benefits of professionally managed money and diversification.

How are variable annuities valued?

The value of a variable annuity is based on the performance of an underlying portfolio of sub accounts selected by the annuity owner. Fixed annuities, on the other hand, provide a guaranteed return.

How are variable annuities regulated?

Regulation. Variable annuities are securities registered with the Securities and Exchange Commission (SEC), and sales of variable insurance products are regulated by the SEC and FINRA.

How do you annuitize a variable annuity?

There are two ways to annuitize a variable annuity. You can either opt for a fixed monthly income or a variable one. Virtually every annuity owner who chooses to annuitize goes for the fixed option – receiving a consistent stream of monthly payments at a fixed amount, which will never change.

What happens when a variable annuity is annuitized?

When you annuitize, you can move away from the market-based value changes that defined the accumulation phase of the annuity and lock in a fixed monthly annuity payment. The amount of the payment will be based on your current annuity value, current interest rates and the income option you pick.

How long does it take to cash out an annuity?

How Long Does It Take To Cash Out an Annuity? Annuity owners can receive their cash within an average of four weeks. This time frame depends on the annuity type, the insurance company and the purchasing company.

How is the value of a variable annuity determined?

With a variable annuity, you select multiple sub-accounts, which are essentially mutual funds that invest in stocks, bonds or other instruments. The value of your account—meaning the amount of your payments during the withdrawal phase—depends on the performance of these underlying investments.

Why are variable annuities good for a 401k?

Variable annuities share certain features with IRAs and 401(k) plans, including tax-deferred growth. As a result, you can hold off paying taxes on gains until you start receiving payouts.

What do you need to know about fixed annuities?

Annuities have long been a popular strategy for managing this so-called “longevity risk.” A standard fixed annuity is an insurance contract that allows an individual to pay premiums—either in a lump sum or by monthly installments—and obtain set income payments for life.

Why is my annuity taxed as ordinary income?

Any growth in your annuity above and beyond your contributions is treated as ordinary income. If you’re in a higher tax bracket, that aspect alone can take a huge bite out of your earnings. Further eroding your account are the notoriously high fees that insurance companies charge their annuity customers.