by Guest » Fri May 08, 2009 10:19 am
After reading some of the scary stories on this board itself I’ve become more interested in knowing about the variable annuity plan. I question is, should we altogether discard this financial tool or someone young can still benefit from investing in variable annuity plan?
Posted: Tue May 12, 2009 11:54 am Post Subject:
Hi Expert,
However, at the same time, the increased costs of the variable annuity can have a dramatic impact on performance over a long time period.
By 'impact on performance' do you mean the effect on returns?
BarbieL
Posted: Wed May 13, 2009 01:30 am Post Subject:
By 'impact on performance' do you mean the effect on returns?
Yes. Let me make up an example for you. Joe and Jill are both 30 and have $100,000 to invest. Joe puts the money into a bunch of growth stocks. Jill puts the money into a variable annuity. The VA has total expenses that are 1.5% higher than the mutual fund. The subaccounts that Jill chooses perform identically to the stocks that Joe picked. This means that if Joe got an 8% return, Jill got a 6.5% return.
What are the results at age 60 before selling the investment? Joe has $1,000,000. Jill has $660,000. If this is non-qualified money, Joe will pay capital gains tax and Jill will have to pay income tax.
What if they both die. What is the impact after their beneficiaries get the money? Joe's kids will get $1,000,000 with no taxes. Jill's kids will have to pay income tax on a $560,000 gain. Joe's kids will have twice as much money at death.
Playing around with the numbers will change the numbers, but it won't change the conclusion.
If one is paying more to own a VA, there needs to be a reason to do so. Tax deferral for a VA under current tax laws is a negative and not a positive.
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