When is a Tax Deferred Variable Annuity a good strategy?

Me and my spouse are 45 and 47 years old. We both max out our 401(k)s and IRAs. Our 401(k) contributions make us on track for retirement. We have good liquidity. We have $200,000 to invest and our financial advisor is recommending a Tax Deferred Variable Annuity. What is your recommended strategy?

Investing, Annuities
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11 hours ago

The value that Variable Annuity are sold upon is for increasing tax efficiency. If you looked to invest your $200,000 into Mutual funds in a regular investment account, you would receive taxable income in the form of dividends and capital gains every year. An annuity defers all income from the funds. However, you need to understand how they work:

  • When you take a distribution, the earnings come out first which reduces tax efficiency.
  • Like an IRA/401k, money that you take out is subject to a penalty if you are under 59.5.
  • Fees are normally high.

I recommend that you create a portfolio of ETFs. ETFs are tax-efficient. The goal would be to hold them for at least a year to get long-term capital gain treatments. The investments would be liquid in case you needed money. You can build a portfolio for a small amount of fees.

If you are still interested in an annuity, some insurance companies (like Jefferson National) have no-load annuities. These are a decent compromise.

I hope this helps.



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