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Pixy writes:
The other route is a variable annuity, a product marketed by insurance companies and one not too popular within Fooldom except for those who have already exhausted all other tax deferral options, and who have an income tax problem, and who can let the money sit for 15 or more years. If your friend can't meet at least two out of three of those items, then a taxable alternative is probably far better than the annuity in terms of net return after taxes. <\i>

However, the question was about putting STOCKS in a variable annuity. This is almost always a losing proposition compared with a regular taxable investment, over 15 or 50 years, due to the fees.

Specifically, for the vast majority of people:

1. the annual fee that a variable annuity charges is HIGHER than the taxes you would pay each year on the distributions on the regular taxable investment. Example: 1.5% annuity fee exceeds a 39.6% tax rate on about a 3% distribution or a 28% tax rate on a 5% distribution.

2. the taxes you will owe on any amount you withdraw from the variable annuity will be HIGHER than the taxes on cashing in the same amount of the regular taxable investment (since capital gains rate is lower).

Why would you want to avoid X dollars in taxes by paying more than X dollars in fees to the insurance company?

The above assumes you use a buy-and-hold strategy with a tax-managed mutual fund.


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