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I went through the same thing a couple of years ago. I resolved most of my questions by scheduling a meeting with a TIAA-CREF representative who visited my university.

My take on the differences between the mutual funds and variable annuities at TC is:
1. Each type of account at TC will have access to either one or the other and you don't usually get to choose which. For example, my 403(b) and supplemental retirement accounts are variable annuities, but my son's Coverdell ESA is a mutual fund.
2. There are overlapping, but non-identical investment funds within each category. For example, annuities have a Global fund that includes both US and international, while the mutual funds have separate US and International funds. Also, the Real Estate account (which I love!) is only available as an annuity -- there is a REIT fund in the mutual fund side but it is different.
3. Costs are low on both sides.
4. Withdrawal rules depend on the type of account it is. You'll need to check what the rules are for a 401(k). Upon retirement if you want to convert your variable annuity into a guaranteed payment (a process that I believe they call annuitizing), then you can. I don't know if you have this option on the mutual funds.

I'm not sure about your taxation question -- I think that the annuity comes back to you as ordinary income. Now that you mention it, this is an important question! I think I will look into it some more.

As for the fees at TIAA-CREF, they are great. True, you can get lower at a Spartan fund from Fidelity but even the International fund at TC is around 0.5%! I think that the S&P tracking funds might have additional expenses associated with the trouble of tracking an index that updates its composition every year, but I am just guessing.

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