Fideltiy Variable annuity

[sam]

Has any one used Fidelity Variable annuity? It is kind of NON deductible IRA where you contribute after tax dollar and it gorws tax free until you withdraw funds. Only profits are taxed.

Pros:

Only reason I am attracted to it is TAX free growth in today or future high tax environment.

CONS:

Not very good fund selections and most of funds are siblings/other share class of other funds with higher ER.

Annuity fees are like 0.25%

Question I am trying to understand is:

On my fund portfolio I have to pay tax on distributions or rebalancing (capital gains). Money lost to Uncle SAM

In Annuity I have to pay higher ER and annuity fees (0.25%) and fund selection is ok. Most of funds are NOT low cost funds. like emerging markets or small cap. In IRA one can use ETFs. I think extra expense will be like 0.4%- 0.5%

So total higher expense will be like 0.25 % (annuity charge) + 0.5% (higher ER of mutual funds) = 0.75%

Q: Money lost to Uncle SAM > or = higher expenses + lower selection of funds  > Tax free growth? if I will come out ahead in 20 years.

[yogibearbull]

After you have exhausted other tax-deferral options (401k/403b/457, IRA), you may consider VAs for more tax-deferrals. These can be found from Fido, TIAA, Vanguard, etc. Vanguard is put as last because recently Vanguard shifted VA servicing to Transamerica and reports have been bad (Vanguard now just manages VA portfolios). 

[anitya]

I have not looked into VAs but if the funds available in a VA are the same as in my taxable account (even if limited to one fund family), I would not mind paying an additional 0.75% in fees for the certainty of no tax surprises from YE distributions.

Does T Rowe offer VAs?

Thanks.

[yogibearbull]

Annuities (fixed, variable) are insurance products. So, obvious sources are TIAA, Allianz (Pimco), MetLife, NY Life, Principal, Transamerica, etc. Low-cost annuities may serve a useful purpose for those not having access to 401k/403b/457. In fact, before these workplace retirement plans and IRAs came along, annuities were among the work horses of tax-deferred investing. There are of course bad annuities that are expensive, agent-sold, with lots of bells-and-whistles. But there are some good low-cost, direct-sold annuities too.

Big brokers and fund families have partnerships with insurance companies - Fidelity, Schwab, Vanguard, etc. Until recently, Vanguard used to be good but it ruined it by moving VA servicing to Transamerica. Rowe Price website doesn't show any annuity products, but its funds may be available under some VAs.

Lines are fuzzy for insurers with brokerage arms (TIAA, Principal, etc) and for funds/brokers with insurance subsidiaries (Fidelity has one, but then it is into everything; most Fido annuity and insurance products use other insurers).

[anitya]

Are not annuities subject to credit risk of the underwriting company? If so, I guess one could go with too big to fail whose financial health and activities are monitored by the federal government. If it is just paying an additional 0.75% fees, it is tolerable.

[yogibearbull]

I had 2 insurance companies fail, and I like to monitor things. So, stuff can happen  . And once you go with an insurance company, you are almost stuck. With annuities, one can do 1035 exchange if unhappy. There are insurer ratings from A.M. Best, Moody's, Moody's, Fitch.

[sam]

Variable annuity should NOT have any credit risk as there is no mortality benefit and there is no fixed payment (income payment obligations). You will eat what you will make and grow with your funds within annuity.

[liftlock]

Jun 12, 2021 3:00:25 GMT sam said:

Has any one used Fidelity Variable annuity? It is kind of NON deductible IRA where you contribute after tax dollar and it gorws tax free until you withdraw funds. Only profits are taxed.

Pros:

Only reason I am attracted to it is TAX free growth in today or future high tax environment.

Taxed deferred growth can be achieved in a taxable account by investing in growth ETFs that don't pay dividends.  Gains are taxed at favorable capital gains rates when funds are sold, assuming long term holding periods are satisfied.  I am not certain whether long term gains on annuities are taxed as ordinary income or at favorable capital gains rates.