8 Reasons Why You Should Invest With Mutual Funds Instead Of A Variable Annuity

Variable annuities (VA) are an insurance product that is best described as a mutual fund wrapped in an insurance wrapper and covered with fees. They have several advantages over mutual funds.

No reasonable person would argue that investing in a VA is a smarter move than investing in an IRA, Roth IRA, or 401K.

However, it isn’t uncommon to hear arguments that “a doctor in a high tax bracket should invest in a VA instead of in mutual funds in a taxable account.”

8 Reasons Why You Should Invest With Mutual Funds Instead Of A Variable Annuity

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If the chief upside of investing in a VA is tax-deferred growth, then the chief downside is that when you pull the money out it is taxed at your ordinary income.

1) Variable Annuity Withdrawals Taxed at Ordinary Income Tax Rates

If I own a mutual fund in a taxable account, I can sell it any day the market is open and buy another one or just take the proceeds, pay taxes on them, and purchase a boat.

2) Lack of Flexibility in a Variable Annuity

If you want to exchange one VA for another, you get to go see another agent, sign another contract, move the money etc.

Most VAs are chock-full of poor investment choices. The “sub-accounts” are often poorly-performing, actively managed funds with little incentive to keep fees low.

3) Poor Investment Choices in a Variable Annuity

Surrender fees generally start at about 7%, generally decreasing by 1% a year.  Sounds like a load, no?  Would you buy a loaded mutual fund?  Of course not.  So why would you buy a loaded VA?

4) A Variable Annuity Has Surrender Fees

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