Newspaper article St Louis Post-Dispatch (MO)

More Investors Stash Money in Annuities

Newspaper article St Louis Post-Dispatch (MO)

More Investors Stash Money in Annuities

Article excerpt

When Congress turns to raising taxes, American investors turn to variable annuities.

The Tax Reform Act of 1986 that eliminated so many tax-saving opportunities provided the initial stimulus. Last year's reform that boosted the top marginal tax rate gave yet another big push.

As a result, variable annuities now total more than $220 billion in assets, up dramatically from a year ago, and momentum is going strong.

For those of you who haven't caught the fever, a variable annuity is a product offered by insurance companies, brokerage firms and banks that lets you invest in mutual funds and defer accumulated earnings until you begin to withdraw money. That's likely to be when you're retired and in a lower tax bracket.

"Today's consumers . . . realize the historical return on equities is 4 percent higher than fixed-rate choices, so as they increasingly focus on returns, the variable annuity looks good," said Robert Fiondella, chairman of Phoenix Home Life Mutual Insurance.

All annuities are contracts with an insurance company. However, because the policyholder makes the decision on the proper variable annuity fund, or "subaccount," how well your investment does depends on how wisely you invest.

So, if you can't stomach the vagaries of the markets, don't choose a variable annuity. The fixed accounts within variable annuities that offer a guaranteed rate for one to three years won't make sense either, because their average rate is only around 4.5 percent. You'll still have to face the average annual contract charge of 1.25 percent, plus annual fund expenses, which can bring costs to around 2 percent a year.

Those costs mean it's best to be in at least the 28 percent tax bracket for a variable annuity to be worthwhile.

"Our philosophy would be to maximize contributions to your company 401(k) plan and your individual retirement account first, but, over and above that, focus on variable annuities," said Richard Jameison, president of Fidelity Investments Life Insurance Co. "The deferral aspect is obviously an advantage, though keep in mind that it's not a tax dodge, for eventually you'll be taxed on it. …

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