Another major appeal of variable annuities is that you can make tax-free transfers within your account among the portfolios your annuity offers. For example, if you want to increase the percentage of your retirement savings in more aggressive growth stocks, you can shift money from a balanced or money market portfolio into the stock portfolio. Or you might want to readjust your asset allocation from time to time. This flexibility lets you have continuing control over your retirement savings.   The earnings in the sub-account you’re taking money out of, which have grown tax-deferred, can be transferred, without tax, into another sub-account.

Equity-Indexed Annuities

Technically, this is a form of a fixed, rather than a variable annuity, but your return is tied to a stock index ( e.g the S & P 500) that provides the opportunity to earn a return that is better than the traditional fixed annuity.  The purchaser does not choose investments, but is able to participate in the stock market to some degree, with a guaranteed minimum return (typically around 3%).

One confusing feature of an equity-indexed annuity (EIA) is the method used to calculate the gain in the index to which the annuity is linked. There are several different indexing methods that companies use. Because of the variety and complexity of the methods used to credit interest, it may be difficult to compare one EIA to another.

It is possible to lose money in an EIA, since some companies guarantee a minimum return of only 90% of the premium plus the guaranteed annual interest rate.  As with all annuities, early withdrawal can also result in a loss.

EIAs carry more risk (but more potential return when the stock market rises) than a fixed annuity, but because of the guaranteed interest rate, they have less risk (as well as less potential return) than a variable annuity. 

For specific tax advice, please consult a qualified tax professional.

Guarantees are subject to the claims paying ability of the issuing insurance company.