A variable annuity is an investment agreement with an insurance company that involves deferring taxes on any investment earnings until the money is withdrawn. The amount of money you can contribute to a variable annuity is limited by the Internal Revenue Service.

Variable annuities come with features such as annuitization or period certain drawdown, automatic rebalancing and beneficiary protection to ensure that your money continues to work for you, even if something happens to you.

When you buy a variable annuity, you make an agreement with an insurance company. The insurance company will typically invest your money in a portfolio of stocks and bonds, with the potential for solid returns if the markets do well.

Unlike fixed annuities, the value of a variable annuity is linked to the performance of the underlying portfolio. It’s an investment in which the value of the account fluctuates with the performance of its underlying investments. This offers the potential for higher returns, but there’s also a chance that the account could lose value.

You may choose to invest your money in an annuity with a variety of subaccounts, such as stock, bond, international, and money market portfolios. You can either select funds yourself, or allow the annuity company to manage your investments for a fee. Each of these investments carry different risks, so you’ll have to consider each one carefully.

Variable annuities also come with a number of features designed to ensure your long-term financial security. For example, annuitization or period certain drawdown allows you to take a guaranteed income stream for a set number of years, regardless of the performance of the underlying investments. Automatic rebalancing helps ensure that your portfolio remains within your stated risk tolerance. And beneficiary protection ensures that, in the event of your death, any remaining funds will transfer to a designated beneficiary.

In general, variable annuities can provide a great addition to your retirement portfolio, while offering the opportunity for more growth than fixed annuities. Of course, there is always the chance of a loss, so it’s important to understand the risks involved. To get the most out of a variable annuity, it’s essential to work with a knowledgeable financial professional with experience in this unique and complex product. In addition, it’s important to review the terms of the annuity carefully before signing on the dotted line.