Variable Annuitys
Even though variable annuities are often recommended by financial salespeople, the truth is they only make sense for a small percentage of investors. A variable annuity is basically a tax-deferred investment vehicle that comes with an insurance contract which is usually designed to protect the account from losing capital.
Tax laws allow gains inside the annuity to grow on a tax-deferred basis. However, investors should not be tricked into buying variable annuities just because earnings are tax deferred. For most people variable annuities are not sound investments, here are some of the reasons why:
Variable (Deferred Annuities) are Expensive
The performance of any investment can be negatively impacted by large management fees and commissions. Variable annuities are known for their exorbitant fees. The average annual expense on variable annuity sub-accounts is over 2% of assets, while mutual funds typically charge 1% to 1.3%. Variable annuities also pay brokers and investment advisors up to 7% commission, a huge percentage compared to other investment products. This large commission is probably the only reason why an investment advisor or broker would recommend these products.
Death Benefit Scam
For an extra annual fee of 1.03% variable annuities offer a death benefit. This basically guarantees that your account will be worth at least your investment amount if you die before the annuity payments kick in. However, since the stock market has returned an average if 12% annual from 1926 to 2004, long term investors do not need to pay 1.03% annually for this type of protection.
Huge Surrender Fees
Unlike most mutual funds, variable annuities require that you stay invested for at least five years. Withdrawing funds during this “lock up” period will result in huge penalties and fines. The average surrender fee is 6.3%, meaning that even if your account is positive you could still end up losing money if you take funds out before the lock up period expires.
Early Withdrawal Penalties
Withdrawal penalties on variable annuities are the same as most retirement accounts. If you withdraw funds before age 59 1/2, you'll be hit with a 10% early withdrawal tax penalty.
The Taxes
Gains in variable annuities are taxed at ordinary income tax rates, not long term capital gains. This is a huge distinction between annuities and other investment vehicles like mutual funds. Ordinary federal income tax rates are as high as 39% while long term capital gains are taxed at 15%.
This tax difference can easily offset the advantage of an annuity's tax-free compounding. It may take 15 to 20 years for variable annuities to become more tax efficient thatn mutual funds. Residents in California, Florida, Maine, Nevada, South Dakota, West Virginia and Wyoming and Puerto Rico pay even more taxes on non-retirement variable annuity accounts.
Estate Planning Disaster
If you should die before the annuity is fully paid out, the ordinary income tax requirment of these products are passed on to your beneficiaries. Your beneficiaries will inherit all the taxes that you have deferred in your annuity account. This is an estate planning disaster when compared to mutual funds, which have a step up basis at death, which usually means that your beneficiaries would owe no taxes on the gains.
Legal Help is Available
If you or a loved one purchased a variable annuity you may have be cheated out of thousands of dollars. Contact Mark & Associates, P.C. today to have an experienced investment fraud attorney analyze your case. We can fight to get your money back and there are no up front legal fees. We only receive compensation if we recover money for you.
To receive a free variable annuity case evaluation please complete the submission form on the right side of this page or call 1-866-50-RIGHTS (1-866-507-4448).