No. of Recommendations: 0

Using a "buy and hold" strategy with a stock portfolio through a discount broker is a viable option. Unless you're holding REITs and utilites in your account, dividends shouldn't drive your decision. The dividend yield on the S&P500 less than 1.5%.

You might also consider something like the Vanguard Tax Managed Growth and Income Fund. This is an S&P500 index fund managed so as to eliminate the annual capital gains distribution you must pay taxes on even if you don't sell the fund. You still have to pay taxes each year on the dividend yield, but the yield is only 1.5% of assets. For someone in the 28% tax bracket, the tax amounts to 0.42% of assets.

The annual expense ratio for the fund is 0.17%. If you add the 0.42% you'll pay in taxes on the dividend, that's total annual expenses of 0.59%. It's hard to believe you'll be able to find a variable annuity with annual expenses even close to that.

Now for the biggest reason Variable Annuities are no good. When you start withdrawing money from your variable annuity it's taxed as ordinary income (max Federal rate = 39.6%. When you withdraw money from your tax managed mutual fund, it's taxed as capital gains (max = 20%). Even if you found a variable annuity with lower fees and expenses (no chance!), the capital gains advantage would be hard to ignore.

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