Retirement & Financial Planning Report


Variable annuity costs are higher than mutual fund expense ratios. In return for the higher cost, investors receive some advantages mutual funds can’t offer:

* Investment income inside a variable annuity is not taxed until withdrawal. Mutual fund investments generally throw off taxable income each year, which can lead to higher income taxes, exposure to the alternative minimum tax (AMT), and taxation of Social Security benefits.


* With a variable annuity, there are no minimum distribution rules, no limits on the amount that can be contributed, and no medical underwriting. If you wish, you can defer taxes indefinitely on investment income. When the account passes to your beneficiaries, they can choose to stretch out taxable withdrawals over their life expectancy.

* Variable annuities don’t have to go through probate. They pass directly to named beneficiaries.

* Variable annuities offer a return-of-investment guarantee to beneficiaries, even if the investment accounts have lost money. In recent years, various “ratchets” have been introduced, to increase the death benefit above the initial investment amount.

* In the past few years, “living benefits” have been added to variable annuities. These living benefits offer a money-back guarantee, or even a guaranteed return.

There is a cost for these guarantees (usually an addition to annual charges) as well as some conditions. Investors might be required to keep their money with the same issuer for a certain number of years.

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