What You Must Know About Variable Annuity Taxation

As with any investment vehicle, it's important to know the tax ramifications that can impact your future profits and financial success. Taxes can significantly alter how your investment grows or how or when it can be accessed for the most return. Annuities offer a unique tax structure. The variable annuity taxation structure can initially help your investment grow, but you will eventually need to pay for the profits. Learn more about how the variable annuity taxation situation can affect your financial investment.

Similar to a traditional annuity, a variable annuity will let you receive periodic payments from the investment for the rest of your life (or however long you determine). Also, the variable annuity is a tax-deferred financial choice. In this way, the investment can grow throughout the investing time. Also, you can transfer money from one investment option to another in the variable annuity without being charged tax fees.

When you take your money out of the variable annuity, you will suffer the taxes that are relevant to the investment. However, when it comes time for taxes, the investor will be charged at an ordinary tax rate instead of the lower capital gains tax rate. Although this seems like a detriment, the benefits of the tax deferral over the years before the income is pulled out can be tremendous. The investment can increase at a higher rate and the impact of the eventual tax fee is not as hard on the income checks. If you hold the variable annuity as a long-term investment to meet retirement and other long-term goals, the tax deferral status will outweigh the tax fees in the end.

Another form of variable annuity taxation is through something called a tax-free "1035" exchange. With this form of investing, you can exchange an existing variable rate annuity contract for another annuity contract without having to pay any of the tax fees associated with the income or investment gains. If you want to change the benefits of your annuity by increasing the death benefit or having a different payout option, this can be a smart investing option. However, you might be required to pay the charges for changing the old annuity if you are still in the surrender period that will make you incur the fees. Typically, the surrender period can last as long as 10 years and if you change your annuity during this time, you will be charged fees.

For more information from Steven on how to invest in annuities, visit Free Annuity Rates .com. To learn more about fixed annuities, see the Fixed Annuity Guide. To calculate premiums, see the Annuity Calculator.