Variable annuities allow you to invest in mutual funds without paying taxes each year. When you invest in a variable annuity you can allocate the premium you pay among several accounts, many of which resemble mutual funds.
As long as you keep the money inside the annuity, no taxes are due. That’s true even if you switch your money from one fund to another. What’s more, capital gains distributions are automatically reinvested, tax-free.
Thus, if you pay a great deal in taxes each year because of mutual fund trades and fund distributions, consider a variable annuity. Be certain you can hold on until age 59 1/2, when a 10 percent early-withdrawal penalty no longer applies.
Ideally, you hold a variable annuity for at least 15 years before taking money out: over that time period, the advantage of tax-deferred compounding will outweigh the costs you’ll pay to the sponsoring company.