What An Annuity Offers

Is a variable annuity a good way to save money without paying taxes?

QUESTION: Kathy makes too much money to fund a Roth IRA. Her financial advisor wants her to do a variable annuity, which will keep her from paying taxes. Dave has run the numbers on this many times, so he knows how to counter that argument.

ANSWER: Variable annuity has some neat features, one of which is tax-deferred growth. Another feature that’s not so neat is that your financial person will make 2 or 3 times the commission that they would make on a typical mutual fund sale, so they tend to be drawn toward variable annuities. But I don’t care for them because you tie your money up for a long, long time. I use low turnover mutual funds. That is a mutual fund where they hardly ever sell the stock that’s in it, and you look at that as a turnover ratio. A low turnover mutual fund would have 5% turnover or less. What happens then is you basically have tax-deferred growth without having to trap your money for a long time or paying annuity fees.