One reason to buy a deferred
variable annuity is for
tax-deferred
earnings. But depending on your situation, you may find better tax advantages elsewhere, since your annuity earnings will eventually be taxed at your regular income tax rate, not the lower
capital gains rate.
And unlike contributions to a deductible
IRA
or
401(k),
which may reduce your current taxable income, your contributions to a variable annuity are fully taxable. Whether you’ll enjoy any tax advantages by buying variable annuities depends on several factors:
What your income tax
rate will be when you start receiving payouts
Whether your tax savings
outpace charges and fees
How long
you’ll be invested in the annuity
If you’re
confused about the pros and cons, you might want to talk
to a fee-based adviser who can help you calculate and compare
your alternatives. Experts usually recommend that, for
the greatest tax advantage, you contribute the maximum
to your 401(k) and IRA before considering an annuity.
Trouble in IRAs
You should
think carefully before including a variable annuity in your IRA.
Earnings in an IRA are already tax deferred, so you won’t have any
additional tax benefit. Your return will be reduced by the annuity’s
fees and charges. And with a traditional IRA, you’ll have to start
taking withdrawals at age 70 1/2. If that occurs within your annuity’s
surrender period, you’ll pay
surrender fees.
So unless you decide to hold a variable annuity in your IRA for the
lifetime income or guaranteed return of principal it provides, most
experts recommend against it.
