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Chapter 20 – Variable Annuity vs Roth IRA

Of course it goes without saying the best time to invest money is when you have a extra money, which you could spend, but you don’t really have to or need to. This is when you need to think about investing the money and saving it for a rainy day or in many people’s case now days saving it for financial security during their retirement years. First you have to find a good place to put the money.

You want to save it, but you want it to earn money while it is sitting there. You have heard of making your money work for you, well this is definitely one of those times you want your money to increase. $5,000 won’t last very long in today’s time, but it is a good start for an investment savings fund. So where do you put it?

If you are considering long term investments, you will want to consider a variable annuity or a Roth IRA. So which one is better? We are going to look into the differences and the similarities between the Roth IRA and a variable annuity.

First thing you need to know is: Contributions to a Roth IRA and a variable annuity are not tax-deductible. However over time they both grow tax-deferred until the time of the withdrawal. Then the payments received from an annuity is taxed at a normal income tax rate, but the payments from a Roth IRA are not taxed, if the account is at least 5 years old and the owner is over 59 ½. Law may change between now and the time you will withdraw.

The types of investment assets with both the IRA and the annuity are pretty much the same. Usually they will consist of stocks, bonds, money market investments and mutual funds. Mutual funds are the best investment for small investors with only about $2,000. They are professionally managed and provide a diversified investment packet, which is a lower risk.

Variable annuities offer a death benefit to a named beneficiary to avoid probate, however taxes are payable on any earnings. There is flexibility in a variable annuity while it is still in the accumulation period. Investments can be transferred without paying taxes, but a withdrawal still carries a tax penalty for a beneficiary less than 59 ½

With a Roth IRA you can only invest if you have an income, which is below the threshold of $95,000 for singles and $150,000 if you are married. Contributions are limited to only $2,000 per person per year. With a traditional IRA you can do this even if you are making contributions to a pension plan. Roth IRAs are very flexible and withdrawals of the contributions can be made at any time, but not the earnings. There are no required withdrawals during retirement.

The flexibility of the Roth IRA to many people is a way to avoid the penalty tax for early withdrawal, which you have with the variable annuity. However this can be used to your disadvantage. You could find yourself making early withdrawals for good reasons and by the time you are old enough to need it, there is not enough left.

For every investment there will be a charge and benefits. Over time the benefits will more than outweigh the charges. There will be an annual charge with both types of accounts, but soon the benefits will outweigh them also.

The choice between a Roth IRA and a variable annuity will depend on the person who will be doing the saving. If you don’t trust yourself not to dip into your savings every now and then, you might want to opt for the variable annuity. The most important point here is to invest in your financial security in the future.

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