What is the Difference between a Variable Annuity and a Fixed Annuity?

What is the Difference between a Variable Annuity and a Fixed Annuity?
If you are a teacher and/or work for the Department of Education, you may be contributing to a 401K plan provided by the Teacher’s Retirement System.
 
There are two types of funds you can contribute to:  The Diversified Equity Fund (Variable A Annuity Program) or the Fixed Return Fun (Fixed Annuity Program).  Here is the difference between the two:

In a Variable A fund, the stocks and bonds purchased are from a diversified group and although riskier, yield a higher rate of return.  For example, in July 2008, the unit value was $62.88.  Since we have not received the next quarterly statement since the market crisis, there may be significant losses incurred.

The Fixed Annuity Program, on the other hand, offers a guaranteed annual rate of 8.25%.  Currently, this rate has been extended through June 30, 2009.
 
There is a third fund called the Variable B Annuity Program (Stable-Value Fund) which showed a unit value of $19.525 as of July 2008.
 
As contributors to any one of these funds, you can select one program or combine two programs such as Variable A (50%) and Fixed Return (50%) or any percentage of each fund that totals 100%.

Recently, TRS introduced the Passport Funds program.  This allows members to submit election changes (percentage change of funds) at any time.  The elections would take effect on the next quarterly conversion date that occurs at least 30 days after receipt of election changes.  In the past, members were only allowed to make changes to their fund contributions annually.

Since this is akin to a 401k Plan, early withdrawal of these funds incurs a 10% penalty before the age of 59½.  However, upon reaching said age you have the option of rolling over these funds, without penalty, into a Roth IRA if you so choose.

According to one source, “A fixed annuity provides more security of principal than a variable annuity, but has limited upside potential.  When you invest in a variable annuity, you accept more short-term volatility in that the value of your investment will fluctuate with the stock and bond markets.”

Considering the volatility of the stock market, if you can convert your Variable A Program to a Fixed Return Fund, you may be better off in the long run.