Annuity IQ

How many times have we heard that variable annuity tax deferral is worse than capital gains on taxable accounts, but is it really? I have seen tons of mathematical examples of how the capital gains tax rate is superior to tax deferral, but very rarely, if ever, do you see a real example.

I wanted to show a very straight forward illustration on how tax deferral is better than taxable accounts. I ran 2 hypothetical illustrations using American Funds Investment Company of America one with taxes and the other tax deferred, but I did include a 1.5% M&E cost along with the fee of the mutual fund.

In a nutshell, the tax deferred account won, even with higher fees.

Here is the scenario $100,000 investment made into ICA by a couple who earn $100,000 a year in income. Their Federal tax rate is 25%, long term capital gains are at 15% and their state taxes, which most people forget about, are 5%. I did show that the taxes were paid from the distributions, after all how can you show a true after tax return if it was shown any other way. Taxes are due no matter if distributions are reinvested or taken as cash and even if you pay taxes out of pocket that is money you could have been reinvesting and it still reduces your rate of return.

In the variable annuity example I simply used the 1.5% M&E fee with the fund expenses.

Here are the results: (click on the image to enlarge)

Clearly the variable annuity performed better, contrary to popular belief.

You look and you decide.