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The Truth About Variable Annuities

October 8th, 2015 at 09:55 am

You're worried about your income taxes and the nice insurance guy tells you about a product that is like an IRA, but that you can put in essentially an unlimited amount, and defer the tax hit. Best of all, it's invested in mutual funds that you get to choose. Sounds like a pretty good deal.

Truth to tell, there are a few people for whom variable annuities make sense, but only a few. A variable annuity is an insurance product, that has 'sub accounts' that allow you to choose mutual funds to invest the money. So far so good. But the problem with VAs are the fees.

First, that nice insurance agent who talked to you is collecting a commission of anywhere from 6 to 10%. So if you invest $100,000 he is taking up to $10,000 off the top. To find out how much it is, ask about the surrender charge. Then there is what is called the M&E (mortality and expense). That runs on average 1.5% per year. Then the mutual funds you choose will also have an annual fee of maybe 1% a year.

So you pay maybe $10,000 upfront, and pay 2.5% a year in fees. But you're saving on taxes right? Well maybe not. If you bought a low volatility ETF or an individual stock, you'll pay taxes at a low rate when you sell it if you hold it more than one year. But the gains on your variable annuity? They are taxed as ordinary income, like a savings account.

Variable annuities *do* make sense for two groups of people. If you are in a profession where you are likely to be sued (i.e. a plastic surgeon), the money you put in a VA is almost untouchable in a lawsuit. The other group are people who like to do frequent mutual fund switching. You'd be pay taxes frequently outside a VA, but inside the taxes will all be deferred.

If you really want a VA, get a 'no-load' VA from Vanguard at:


or from Jefferson National at:


There is no commission, and the fees are much less from these VAs.

4 Responses to “The Truth About Variable Annuities”

  1. Ima saver Says:

    Thank you so much for the information!

  2. PatientSaver Says:

    Agreed. Generally speaking, the average person...the "99%ers," don't need a variable annuity. Only very wealthy people could benefit, IMO.

    You might next speak on the topic of immediate annuities, which is a whole other story.

  3. donald_s Says:

    Good idea PatientSaver.

  4. Joe Says:

    Sorry - you're absolutely incorrect about the 'ten thousand' off the top or upfront. You buy a variable annuity and deposit 100k - all of your money goes to work immediately- there is no reduction unlike an 'a' share mutual fund for commissions. You should know this if you're writing investment articles about annuities.

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