Fidelity Variable Annuity (Annuities) Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Fidelity Variable Annuity (Annuities)

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: SAM who wrote (3)	1/6/2007 4:33:51 PM
From: Topannuity	Read Replies (1) of 21

Hi SAM-- I'm assuming your question relates to a so-called VARIABLE annuity (the type which allows you to allocate your money across several stock- and bond-related funds under one account "umbrella"). There are also FIXED annuities which are not at all stock-related. These compete with bank CDs. I will not address those here. An important advantage to investing in an annuity is that the gains grow tax-deferred. You are said to be compounding each year's gains on top of prior years' gains without losing some of your investment to reduction for annual capital gains taxes. A disadvantage to annuities is that when you finally withdraw money from your annuity (after age 59-1/2 when the 10% federal pre-59-1/2 penalty tax on withdrawals disappears) those gains will be taxed at your higher INCOME TAX rate not at the lesser CAPITAL GAINS TAX rates. So if capital gains tax rates in the future remain as low as they are today while income tax brackets remain substantially higher, then in retrospect, you may have been better off not investing through an annuity. Obviously, the longer you stay in the annuity, the greater the advantage of its TAX-DEFERRED growth is in terms of the final taxation. I've read that unless you invest for 12-15 years in the annuity, you won't break even on the above tax comparison. So your planning horizon for this annuity is very important when deciding whether or not to invest in one. I'll explain this a little more -- If you were to buy and hold for example the SPY (SP500 ETF) for 5 years and it tripled in value, your tax bite is likely to be smaller (i.e., you retain more of the gain after taxes) than had you invested in a comparable SP500 variable annuity which tripled in value during the same period. If you were in the S&P annuity for 15 years vs. the ETF your overall tax treatment may wash-out to be the same. A "robust" variable annuity which offers 20-30 internal funds which you can choose between and allocate your money into, permits you to follow a sector-switching strategy and trade in and out of various sector funds as you see fit to all under one annuity "umbrella" so you DO NOT pay any short-term capital gains taxes as you switch between funds. You only pay taxes when you eventually remove money from the annuity. If you are a good sector picker you may be able to outperform the buy-hold performance of the non-annuity SPY ETF and thereby be a net-net winner even after paying the higher income tax rate on the annuity gains. How much (if anything) should you invest in an annuity? You are generally advised to max out your possible annual contributions into traditional IRA and 401k accounts before investing in annuities, since the former provide not only tax-deferred growth (similar to the annuity) but also favorable PRE-TAX income-tax-reducing treatment. Next you should perhaps convert your traditional IRA into a Roth and invest in the Roth account. Then if you have discretionary income after living expenses and after setting aside the maximum allowed in these PRE-tax investments, you can consider putting money in an annuity. Note too that annuity fund management fees are higher than comparable fees in ETFs. However, Fidelity and Vanguard and a few others, offer annuities with relatively low fee structures.

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next