Variable annuity lets buyer build a nest egg tax deferred

The Ticker

November 19, 1997|By JULIUS WESTHEIMER

VARIABLE ANNUITIES became popular by offering tax-deferral on underlying mutual funds. But now that the new tax law is cutting the maximum capital gains tax from 28 percent to 20 percent, many people are asking whether the tax-deferred annuities make sense for them.

What exactly is a variable annuity?

It is a mutual fund, or funds, inside a tax-deferred insurance wrapper. Investments are made in mutual funds offered by the particular annuity.

"Annuities still hold attraction," says S&P Outlook, adding, "Although reduction in the top capital gains rate from 28 to 20 percent lessened their appeal, some investors may find them worthwhile."

Variable annuities appear worthwhile for several reasons: Unlike investments in other tax-deferred accounts, there is no limit to the amount you may invest in a tax-deferred variable annuity -- unless it is held inside a tax-deferred account like an IRA.

And they can pay throughout an investor's lifetime.

"Variable annuities can guarantee income for the life of the investor," says Financial Planning Perspectives. "This is something a mutual fund cannot do. Lifetime income assurance is the most compelling aspect of annuities to investors worried about outliving their retirement assets." Also, variable annuities provide a death benefit that, should the investor die before withdrawals begin, guarantees the contributions or market value of the account -- whichever is greater -- to the beneficiary. Furthermore, many annuities "step up" the minimum death benefit every few years to adjust for market increases. In essence, principal -- and sometimes more -- is guaranteed, an assurance mutual funds cannot make.

Also, annuity investors can switch from one investment to another within the annuity's menu without paying taxes. Investors cannot make a similar switch among taxable mutual funds. This feature allows people more flexibility in adjusting their portfolios.

"The decision of whether to buy a variable annuity or taxable mutual fund in light of lower capital-gains rates depends on your personal situation, age, expected lifetime, reason for investment, comfort level, etc. There is no pat answer for everyone." (Financial Planning Perspectives)

Pub Date: 11/19/97

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