You choose how to allocate your investment dollars, based on your risk tolerance and time horizon. (Keep in mind, though, that this investment is called "variable" for a reason; your account balance will fluctuate along with the financial markets, and there's no guarantee you will get back your entire principal. Furthermore, various fees are associated with investing in variable annuities.)
With either a fixed or variable annuity, you won't pay taxes on your earnings you begin taking withdrawals.
Be aware though, that if you are younger than 59-1/2 when you start taking withdrawals, you will have to pay a 10 percent tax penalty in addition to ordinary income tax on the amount withdrawn.
Apart from tax deferral, annuities offer at least one other key benefit: flexibility in taking your payments.
You can accept distributions as a lump sum, spread them out over a certain number of years or create an income stream for the rest of your life - or even your life and that of your spouse.
Cash value insurance
When you buy permanent insurance, also known as "cash value" insurance, part of your premium pays for the death benefit (the amount that goes to your beneficiary), but some of the payment goes to help build cash value - and this money grows on a tax-deferred basis, similar to annuities, your traditional IRA and your 401(k).
You can choose from a variety of cash-value insurance policies.
In building cash value, some of these policies rely on variable investments, such as stocks. Consequently, your cash value will fluctuate over time, and, as is the case with variable annuities, you could lose some of your principal.
However, you can also choose varieties of cash-value insurance, such as whole life or universal life, that typically pay guaranteed rates of return.
To access your cash value, you can cancel or surrender your policy (although, if you surrender it within a few years of purchasing it, you may have to pay surrender charges) or you can borrow from your policy and pay yourself back with interest.
Ultimately, you can provide a significant boost to your retirement savings by investing in annuities and cash value insurance. So, give them some consideration once you've hit the ceiling on your 401(k) and IRA.
Carmack Kersey, an Edward Jones investment representative, may be reached by calling 744-1776.