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What Are Variable Annuity Subaccounts?


Variable annuities let people to put money into mutual funds, including stock funds, bond funds and money market funds, so the principal has the potential to grow but still enjoy certain tax advantages. Each fund in a variable annuity is called a subaccount. Here’s what you need to know about variable annuity subaccounts, their nature, fees and tax provisions. Consider speaking with a financial advisor if you’re trying to determine how these annuities can play into your financial plan. 

What Are Variable Annuity Subaccounts?

When you purchase a variable annuity, you choose the subaccounts in which your money will be invested. You can also decide how much to invest in each. For example, when buying a variable annuity you might choose to invest 65% of your money in a stock fund, 25% of your money in a bond fund and 10% in a money market fund. In such a case, the annuitant (the person who owns the annuity) would have three subaccounts.

Although variable annuity subaccounts contain investments that are identical to mutual funds, they don’t have a stock ticker you can search on an investment database to find information on the fund. In addition, because of their tax-deferred status, subaccounts may perform slightly differently when compared to their mutual fund counterparts.

Money that is withdrawn from a variable annuity before age 59 ½ is subject to a 10% penalty.

Variable Annuity Subaccount Fees

Variable annuity subaccounts come with lots of fees. Each subaccount charges a management fee, which is often lower than fees charged by mutual funds for similar investments. Secondly, insurers also may assess a transfer fee for shifting funds between subaccounts.

Thirdly, variable annuities charge other fees to protect the insurance company against the risk that you’ll live longer than the issuer’s actuaries anticipated, or that the company’s expenses will be greater than expected. As a result, the cost of a variable annuity often exceeds that of a comparable mutual fund.

Fixed vs. Variable Annuities

The key difference between fixed and variable annuities is their potential for growth. With a fixed annuity, you either make a lump-sum payment or a series of payments and receive a fixed amount every month, quarter or year. In other words, payouts neither increase nor decrease. You pay for the right to receive a consistent income stream for the remainder of your life. However, payouts for fixed annuities can be low relative to their cost to the annuitant.

Variable annuities, on the other hand, allow you to invest your money in the market, giving you the chance to benefit from favorable market conditions. That could lead to higher payouts down the road. But variable annuities also expose you to market risk, meaning you could end up losing money. In other words, with a variable annuity, you assume more risk for the chance of a higher reward.

Types of Variable Annuities

what are variable annuity subaccounts

Variable annuities can either be immediate or deferred. Deferred variable annuities tend to be more popular than immediate variable annuities. Deferred variable annuities have an accumulation phase, a period during which the account’s value grows. Variable annuities typically allow one withdrawal per year during the accumulation phase. The accumulation phase ends and the payout phase begins when you start taking payments from the annuity.

Pros and Cons of Variable Annuities

When compared to fixed annuities, variable annuities have their own set of pros and cons.


  • Tax-deferred: Money in a variable annuity is tax-deferred, so you pay no tax until the money is withdrawn.
  • Customizable: Variable annuity subaccounts allow you to decide how to invest your money; you can pick and choose investments that align with your goals, risk profile and timeline.
  • Death benefit: If you die before the payout phase, there may be a guaranteed death benefit for your beneficiaries.


  • Market risk: Variable annuity subaccounts may expose you to market risk, particularly if you invest in stocks. Hence, you could lose money if equity markets doesn’t perform well.
  • Early withdrawal: Variable annuities are treated like retirement accounts, which means you can’t access your money before age 59 ½ without paying a 10% penalty.
  • Fees: Each subaccount charges a management fee, which is an addition to the fees imposed by the annuity. As a result, total fees on a variable annuity can be quite high.

Bottom Line

what are variable annuity subaccounts

A variable annuity, sometimes called mutual funds wrapped in an annuity, allow you to invest a portfolio of subaccounts that can include investments such as stock funds, bond funds and money market funds. Because they let you invest in the market, variable annuity subaccounts give investors the chance to grow the value of their accounts. Investors may also have some choice over the subaccounts in their variable annuity. However, variable annuities also expose investors to market risk. Fees can also be quite high and you face an early withdrawal penalty if you take money out before age 59 ½.

Tips on Retirement

  • Deciding on the right investments that will help you reach your financial goals can be difficult. Speaking to a financial advisor might be the best way to help you figure it out. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Annuities can help you grow your investment over time, but it can be tough to know exactly how much you need. Use SmartAsset’s retirement calculator to better understand your retirement trajectory and how much you will have in retirement.
  • Investing can be a powerful tool to grow your wealth. Our investment calculator can help you understand how much your investments might grow over time.
  • Before making a final decision about which retirement investments to select, it’s always a good idea to meet with a financial advisor. SmartAsset’s financial advisor tool can help you find a fiduciary financial advisor nearby to help you make the best decision for your situation.

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