What is a variable annuity?

A variable annuity is a retirement savings product. During its accumulation phase, it provides tax-deferral and an opportunity for market growth. During its distribution phase, it can give you guaranteed income for life.

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Annuity basics

An annuity is an insurance product that allows you to build or convert some of your retirement savings into a stream of guaranteed income payments that last for life. With an annuity as part of your retirement plan, you will never be at risk of outliving your savings.

What is a variable annuity, and how does it work? 

There are two main ways to grow your retirement savings with a deferred annuity. A fixed annuity grows at a steady rate that is set when you purchase it. A variable annuity can potentially grow in relation to the growth of the securities markets.

A variable annuity has two phases: the accumulation phase and the distribution phase. During the accumulation phase, the insurance company will offer a variety of investment options that you can use to develop a diversified portfolio. These investment options are invested in stocks, bonds or other types of investments. During the accumulation phase, you can make additional contributions if you wish. Being in the market gives you an opportunity for a greater return than you would get with a fixed annuity, but growth is not guaranteed. During the accumulation phrase the value of your investment may rise or fall in relation to the performance of the variable investment options.

Where can I invest my variable annuity contributions?

The insurance company will provide you with a broad selection of market-based investment options that span a range of different asset classes. If you are a hands-on investor, you can choose the funds or investment options for your portfolio yourself. But if you prefer, many insurance companies, including New York Life, offer customized portfolios for various investment styles. With each investment option, it’s important to consider the objectives, risk factors, and potential fees. Your personal risk profile should guide you as you decide how you will diversify your portfolio of investment options within the variable annuity.

How are variable annuities regulated?

Variable annuities are subject to the rules of a number of different regulatory bodies. Because they are insurance products, they are subject to state insurance law. And because they have investment elements, they are subject to the Internal Revenue Code, as well as to the federal laws and checks and balances that apply to investment vehicles. Variable annuities are regulated by the Securities Exchange Commission (SEC), and the registered representatives who help you create your variable annuity are overseen by the Financial Industry Regulatory Authority (FINRA). Although variable annuities are regulated by these agencies, the products are not approved by the regulators.

Whenever you invest money in a market, you are taking a risk. For many people, the opportunity for growth outweighs those risks, but depending on your retirement goals and where you are right now, you’ll need to weigh the risk factors carefully. In general, the closer you are to retirement, the less risk you will want in your portfolio.

There are often optional riders you can purchase for your annuity that will help prevent your savings from losing value. These riders can ensure that your principal contributions won’t diminish, even if the market declines. This can potentially make them safer than other investments during a volatile market, but there is a charge for the extra protection.

Are there variable annuity fees?

Variable annuities are unique investment products because they offer guarantees, which could include a death benefit and access to principal-protection riders. But these guarantees come with fees. Variable annuity fees include mortality and expense charges, sales and withdrawal charges, administrative fees, investment management fees, and rider charges. With any investment product, it’s important to fully understand all the fees you’ll be paying, as they can materially affect the growth rate of your savings. Always ask for a prospectus that clearly defines the benefits and fees of any investment, so you can compare them. And if you have questions, don’t hesitate to ask your financial advisor for a detailed explanation.


Are variable annuities tax-deferred?

All earnings in variable annuities are tax-deferred. They are allowed to grow tax-deferred, and you pay taxes on earnings only (not the principal) when you begin to withdraw funds or begin annuity payments.

An annuity purchased with after-tax funds, or a nonqualified annuity, has no cap on how much you can contribute. It is allowed to grow tax-deferred, and you pay taxes on earnings only (not the principal) when you begin to withdraw funds or begin annuity payments.

This allows your savings to grow at a faster rate than they would if your gains were taxed immediately, and you’ll have more savings down the road. You can also transfer your annuity funds from one investment option to another without paying taxes. When you do finally withdraw your money or begin annuity payments, your earnings will be taxed as ordinary income. In most cases, withdrawals taken prior to age 59½ will be subject to a 10% tax penalty.

With a tax-qualified annuity, you invest pretax money and pay no taxes until you withdraw your money or begin annuity payments. At that point, you will owe ordinary taxes on the withdrawals or annuity payments.

Note that tax-qualified plans already provide tax deferral under the Internal Revenue Code, so the annuity doesn’t give you any additional tax advantages. Since variable annuities offer both insurance and investment features, they are subject to more fees than other tax-qualified funding vehicles.


Is a variable annuity a good idea?

A variable annuity isn’t right for everyone. Depending on your situation, other investment options or a fixed annuity may be a better fit. Variable annuities can be an effective way to supplement retirement income. A variable annuity investment portfolio can be built to address a variety of return and risk objectives. Consult your financial professional to go over all your options.


Scenario #1: Starting early

You are in your 40s and just got a promotion at work. You’re already contributing the maximum to your company-provided 401(k) and would like to find a way to save further for a comfortable retirement. A variable deferred annuity will give you an additional way to grow tax-deferred savings in the market. When you annuitize those savings, you’ll be able to count on annuity payments for your entire lifetime, even if other savings don’t last.


Scenario #2: Converting at retirement

You are retiring next year and want to convert some of your investments into an annuity to protect against running out of savings. You first look at an immediate annuity, which will begin payouts right away, but the monthly payout will be modest. You’d like some market-based growth, and since you plan to live off other investments for at least a few years, a variable deferred annuity can be worth more when you need to annuitize these savings.


How do variable annuities compare with 401(k)s and IRAs?

These taxed-deferred retirement savings vehicles are similar to the accumulation phase of variable annuities. Most financial professionals advise that you take full advantage of them, but both have caps on how much you can contribute each year. So, after you have maxed out your 401(k) or IRA contributions, you may wish to contribute to a variable annuity. Bear in mind that 401(k) and IRA savings aren’t guaranteed to last for your entire life, as lifetime annuities are. You could, however, roll over a portion of your 401(k) or IRA savings into an immediate lifetime annuity when you are ready for retirement.



Variable annuities are one of many important retirement savings tools. To find the right mix and ensure that you and your family are taken care of now and in the future, you should have a knowledgeable financial professional on your side. We can help you go over your retirement checklist and create a customized plan to get the most out of your golden years.

Variable Annuity FAQs

There are two basic types of annuities: immediate annuities and deferred annuities. With an immediate annuity, the purchaser begins to receive payments shortly after the purchase of the annuity. With a deferred annuity, the money the purchaser puts into the annuity grows until the purchaser is ready to withdraw the funds or annuitize them. The purchaser can make additional contributions while the annuity is growing.


In addition, there are two types of deferred annuities: fixed annuities and variable annuities. Fixed annuities grow at a guaranteed rate that is set when the annuity is purchased. Variable annuities are long-term retirement oriented investments that are invested in stocks, bond or other investments which are affected by market performance. With variable annuities, the purchaser can choose among a selection of variable investment options that are offered by the insurance company. These investment options are similar but not identical to mutual funds. There will be a wide enough choice to meet the needs and goals of virtually any investor. There is a potential for considerably more growth than there is with a fixed-deferred annuity. But there is also a potential for losses if the markets fall.

Short of an FDIC-insured savings account, there is no such thing as a risk-free financial product. Generally, the greater the return expectation an Investor has, the greater the risk will be.


With immediate annuities, payouts will begin right away, and you’ll know what the exact payout will be when you purchase it.


With deferred annuities, your money will be locked up for an extended period of time, so there is more risk. Fixed annuities do not expose the investor to the market risks that are characteristic of variable annuities, though they also lack the upside potential. That’s because a fixed annuity's growth is guaranteed, albeit at a lower rate than you are likely to get with a variable annuity. With a variable annuity, you could lose some of your principal if markets fall, but there is a potential for considerably more growth.


With a variable annuity, growth will rise or fall with the markets. Dips in the market are common. Variable annuities are long-term investments. In the past market downturns have generally but not always been for relatively shorter periods.


Bear in mind, though, that nothing is risk free. You could purchase an immediate annuity or annuitize a deferred annuity right before interest rates skyrocket. You could also purchase a fixed-deferred annuity in a low-interest-rate environment, and be unhappy with your locked-in rate if rates rise.

A variable annuity can be an excellent long-term investment. As with all investments, though, you need to do your research and ask lots of questions before you commit to it. A New York Life financial professional will be able to help you determine whether a variable annuity is right for you.


In general, financial advisors suggest that you first max out your 401(k) or IRA. After that, though, it is worth considering a variable annuity.

Yes, but it may cost you. Variable annuities are long-term investments. If you think there is a good chance that you will need the money before you reach age 59½, a variable annuity will not be a good choice.


Read your annuity contract carefully and consult a financial professional before you make any withdrawals. If you cash out during the surrender period, which can be as long as 15 years for some variable annuities, you will probably have to pay a surrender fee. And, as is the case with all retirement vehicles, there will be a 10% tax penalty if you withdraw earnings before you reach age 59½.


Once you reach age 59½ and are past the surrender period, you are free to cash out the annuity, to take payments from it, or to annuitize your savings for lifetime guaranteed income.

Connect with a financial professional

A New York Life financial professional can help determine what’s right for you.

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Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity. The product and fund prospectuses contain this and other information and can be obtained from a financial professional. Read the prospectuses carefully before you invest or send money.

New York Life Annuities are issued by New York Life Insurance and Annuity Corporation (NYLIAC), A Delaware Corporation, or by New York Life Insurance Company. Variable annuities are offered by NYLIFE Securities LLC, member FINRA/SIPC. Both NYLIAC and NYLIFE Securities LLC are wholly owned subsidiaries of New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010.

Guarantees are based on the claims-paying ability of the issuer.