Variable annuities have two phases, the accumulation phase and the payout phase.
The accumulation phase, during which assets are built for retirement through the selection of annuity portfolios. Any growth in the annuity contract value due to market gains is tax-deferred until withdrawal. Once withdrawn, the gains are taxed as ordinary income.
The payout phase, during which the insured receives payments either via a lump sum, via periodic withdrawals, or through the process of annuitization, which converts the assets income an ongoing income stream. Under most contracts, this income stream can be set up for a defined period or to last the insured’s lifetime. Annuitization is irrevocable, and once payments begin the insured can no longer access the accumulated contract value.