Today is the last day to mail your taxes and as many people now know their investments also come with tax liabilities. Many people will tell you that investing in mutual funds is a better idea than using a variable annuity because of the long-term capital gains treatment. The irony is that the long-term tax treatment is only relevent to sales of your mutual funds that are more than 12 months old and only on a portion of your total mutual fund distributions.

The vast majority of your distributions from your mutual fund account was probably short term income distributions. That means that the gains from this account will be taxable at your ordinary income tax bracket, not the famed 15% long-term capital gains rate that many claim you will be taxed at.

With turnover rates of mutual funds hovering around 100% annually it is highly unlikely that you will pay long-term capital gains on your investments in the future, unless you sell your fund. To add insult to injury the sub-prime meltdown has handed investors hefty losses on their mutual funds and now they owe taxes on a fund that lost them money.

With a variable annuity you would have circumvented both of these situations. The tax deferral would have shielded the investor from taxes and a living benefit would have preserved the investors income or principal, depending on what type of benefit they bought. To find out what type of benefit is right for you go to Annuity IQ to find out more.

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.

There are certainly a lot of anti-annuity financial writers around, but there is one who is totally anti-Annuity. That would be Mr. Burns who writes for a newspaper in Texas. Now, I do not disagree with everything Mr. Burns writes about, but I do disagree with a fair amount of his advice.

Yesterday, Mr. Burns compared management fees to paying taxes in qualified plans. The problem is he is comparing apples to oranges and management fees should never be compared with taxes. A management fee is paying for the fund management and in the case of annuities the guarantees that the annuity provides. While taxes go to the government and funds the nation’s Federal Budget.

In a nut shell Mr. Burns says that paying taxes is not as bad as high expenses, but he used qualified retirement plans as his example. I do not understand why he used qualified plans for his example, but I am not a rocket scientist and he is. In my opinion he should have used taxable accounts to make his comparison, but that would not have made his story or numbers work.

He uses figures that show total amounts paid to the money manager over years and compares them to the current tax rates. He basically extrapolates out money managers and annuity fees over a period of years to make his case, I guess he does not realize that taxes have to be paid annually not every few years, clearly this is not a level headed example.

Mr. Burns then uses 403 (b) and 401 (k) with broker sold mutual fund management fees as an example of higher fees. These qualified investments are not taxed until money comes out so I am still lost as to why he is comparing management fees of these investments to paying taxes. I am also aware that cheaper 401 (k) plans are a must in today’s society and that is fine, but that is no reason to not do a fair comparison.

So, let us reexamine his comparison using realistic accounts, taxable accounts. According to Mr. Burns mutual funds are far superior to variable annuities because of the long term capital gains tax is at 15%. If all we paid was capital gains tax on mutual funds I would have to agree, but we pay much more than 15%. You will receive 4 distributions from mutual funds every year.

1. Short term capital gains – the bulk of your distribution will be short term distributions and they are taxed at your ordinary income tax rate.

2. Long term capital gains distributions – these are taxed at 15% and generally make up a smaller portion of your annual distributions.

3. Dividends – these are paid out quarterly, usually but sometimes monthly or annually, and are taxable, but they make up the smallest portion of your distributions.

4. Capital gains tax, part two- when you sell your mutual fund you will have to pay taxes on the appreciation of the shares of the mutual fund. This would be added on to of the distributions that you have already paid taxes on. If you bought your mutual fund shares at $10 per share and sold them 20 years later at $20 per share you would owe taxes on the difference.

Now, according to two studies, mentioned here before, the average investor looses between 2.5% and 5% of their total return due to paying taxes on these distributions. When we add in another 1% for management fees you may be loosing between 3.5% and 6% of your total return due to taxes and fees.

Compare that to a variable annuity where you will pay 2.5%, including fund expenses, and you tell me which is more. I am not a rocket scientist unlike Mr. Burns who is one, but 2.5% is less than 3.5% and is definitely less than 6%. You should also know that the 2.5% variable annuity charge also guarantees you a stream of lifetime income that can go up over time.

For Mr. Burns to use qualified accounts as an example is bogus and absurd to say the least. He also uses compounded numbers over time and reduces the management fee to a percentage of your total return making it sound like they are robbing you blind. Look behind his numbers and you will see them for what they are, a sham.

Especially considering he shows the management fees compounded over a 40 year period of time and then says; ‘This is far more than the 35% federal tax rate’ what a joke. Mr. Burns TAXES ARE PAID ANNUALLY, not every 40 years! How can you compare a number compounded over 40 years to annual taxes is beyond me, but I digress.

Every time Mr. Burns does his rant and rave about annuities he forgets to mention the living benefits they offer or, on the rare occasion he does mention them, he misrepresents the living benefits offered. Every time he does this he shows his ignorance on how these products work. Instead he is reduced to showing this type of example, a qualified account and comparing management fees to paying taxes? Come on give me a break.

On the brighter side of things he did blow a hole in the anti-annuity crowds argument that variable annuities can cause increase your tax rate to 35% when you take withdrawals. In his first couple of paragraphs he tells you that the marginal tax rate of 35% means you needed income of $349,700 in a given year. Most Annuity owners will not retire with $349,700 in income so it is unlikely they will ever pay 35% on their annuity withdrawals. Sorry for sounding so angry, but a person can only take so much.

I have RSS feeds from all the main news sources that pick up on any annuity story, so I see most, if not all stories written about annuities. This allows me to do my part and try to correct mistakes the authors make, which are usually vast, and it allows me to comment to you on the stories as well. What upsets me the most is when I see stories that keep getting reprinted when they are old and out dated.

This is the case in this post. There was a story on annuities published on the Motley Fool yesterday dated February 6th 2007. The problem is the story is at least 4 years old, perhaps even older, and 90% of the information is outdated and incorrect. I have already commented on this story in the recent past, but I feel the need to comment again because the story is so outdated it is a bit incredulous and they keep reprinting it.

The name of the story is variable annuities: The Lowdown and you can find it by going to Yahoo news and search the term annuity or variable annuity. The story starts out in the usual way, bashing financial advisors who sell annuities.

Here is the opening line: “Insurance salesmen often push variable annuities — mutual fund-like instruments (which generate hefty commissions) upon investors.”

Now, I can easily defeat the commission argument of their statement and will do so in a very near future post. For now I will address why this story should not have been published and how they are negligent in the information they are distributing. If any advisor gave out this blatantly wrong information they would lose their license.

The first thing that comes up is fees and they frame their argument this way: “variable annuity fees can be steep. They’ll typically scarf up more than 2% of your holdings each year, according to Morningstar. That’s negative growth.”

All investments carry fees and all fees are negative growth. Why frame the variable annuity fees this way and let mutual funds, even no-load funds, get away Scott free on their internal charges?

There is no reason other than their biased behavior against these products. Essentially, they believe no one should ever buy an annuity. Any advisor or publication that tells you never to buy one single product or investment is a publication you should steer away from.

The reason I say this is because the publication or advisor either does not understand the product or investment, which is the case with 99% of the anti-annuity crowd, or they are not giving you the full spectrum of products available. In either case it is not unbalanced advice it is the equivalent of pushing there own belief system onto you.

Next, and this shows the date of this article, which I remind you is dated February 6th 2007, is they use the tax argument. The argument is why defer taxes and pay ordinary income on distributions from the annuity versus long term capital gains tax of mutual funds.

Here is what they said: “Earnings grow tax-deferred in a variable annuity, but when the tax is ultimately paid, it’s at your normal rate, which can reach nearly 40%. Compare that with the long-term capital gains rate of just 20%. Even if your tax bracket isn’t very high, if you choose to withdraw most of your annuity funds at one time, that will likely kick you into a higher bracket.”

Here are a couple of points I want to make loud and clear. 1. The top tax rate is 35% not 40% (this is clearly a pre-2003 article republished) and taxes are graduated, which means that not all of your income is taxed at the top rate. 2. The top long term capital gains tax rate is 15% (again, proof this is a pre-2003 article) not 20%.

They also fail to point out that mutual funds tend to spin off more short term capital gains, which are taxed at ordinary income, than long term capital gains. They fail to tell you that the annual distributions from mutual funds can put you in a higher tax bracket and you may be subject to AMT, alternative minimum tax, on top of it. Considering most individuals are in a higher tax bracket when they are working and a lower tax bracket when they are retired this entire statement is plain dumb.

This next quote is a gem. Here is what the, living up to their names, ‘Fools’ say: “It often takes at least 15 years before the performance of your variable annuity will match the after-tax returns of investments in a taxable account. You’ll be tying up your money for a long time.”

They make a blanket statement like this and back it up with zero facts. Here are some facts for the ‘Fools’. A study conducted in 1999 by Arnott and Jeffery and confirmed by Arthur Levitt , former SEC Chairman, concluded that the average mutual fund investor looses between 2.5% to 5% of their total return due to taxes they have to pay on the distributions the investor receives.

Whatever ‘study’ they used to come up with 15 years to break even must be using gross numbers, not net after tax numbers. Plus, they never state where they come up with 15 years anyhow, so until they disclose the study that shows it takes 15 years to break even I consider this argument invalid and incomplete.

The ‘Fools’ went on to write this: “The “death benefit” that will pay your beneficiaries at least as much as you put in to the annuity is often a selling point. But it frequently costs more than it’s worth. Long-term investments in good stocks are likely to increase, not just maintain, their value.” They also bring up the stepped-up cost basis on stocks and mutual funds, but it is covered by the following statement.

Umm, no one is selling or buying a variable annuity because of a death benefit. They are buying or selling annuities because of the living benefits they offer. No soup for you!

They say this next…this is good: “As with instruments such as IRAs, if you withdraw funds before age 59 1/2, you’ll be charged a 10% penalty. Better be sure you won’t need that money soon.”

No way! An annuity is a long term investment? I guess mutual funds are not. 95% of all investments bought or sold in this country are for the long term investor. While the 10% penalty is a very valid point, it makes little sense as I just stated that most investments are long term. Plus, they never mention that you can get money out without the 10% early withdrawal penalty using a 72Q calculation, but hey, never let the facts get in the way of a good story.

I am not surprised by their final bullet point. Here is what they said: “variable annuities offer the option of annual payments. But, you could achieve annual income effectively in other ways, such as by selling off small portions of stock holdings each year or investing in other income-producing securities.”

Anyone who has done a study or a hypothetical illustration of systematic withdrawals from equity portfolios knows it is not always as simple as they are saying it is. They totally ignore the living benefit income guarantees in their final statement. I guess I am not surprised considering the article is at least 4 years old and living benefits where really just beginning to come to the marketplace.

I wrote the ‘Fools’ and told them to stop reprinting old and out dated information, I doubt I will hear back from them. To give out wrong information on current tax rates is almost criminal or at the very least blows their credibility right out of the water. If an advisor gave out wrong information even wrong simple information like the current long term tax rates and they gave out the wrong information, like the ‘Fools’ did, they would be in serious trouble.

I do not know who read their material and why, but clearly people should go elsewhere for their information, especially concerning annuities. I do not care if you dislike annuities, as I have always stated, but if you are going to write a negative article about them please use the right information. Do not run a story that is old and try to pawn it off as something new otherwise you will look foolish.

I believe we need a more balanced approach to variable annuities. It is easy to say that Variable annuities are not right for anyone. It is also easy to say that annuities are right for everyone. In today’s world people are polarized in their positions and being polarized is getting nothing accomplished.

variable annuities offer an opportunity to invest their money tax deferred and provide guarantees that no other investment can offer. They do have drawbacks, but all investments have some kind of drawback. annuities are long term investments and if you draw money out before 59 ½ then there is an IRS early withdrawal penalty. You do have, usually, up-to 10 to 15% annual liquidity on these contracts and you have income guarantees, called living benefits.

People concentrate too hard on the negatives of these investment products and not enough on the good qualities that they offer. We can all make a case against any type of investments based on some negative qualities. There is no such thing as a perfect investment vehicle for all people. By simply pointing out one or two negatives about an investment does not constitute a sound argument. You must look at the bigger picture.

The bigger picture is that variable annuities get people who need equity exposure to invest their money. They do this because a variable annuity offers living benefits and guarantee people their money back in some way shape or form. What people fail to realize is that many investors who are risk adverse and need equity exposure will not invest in mutual funds. They will often times invest in a variable annuity.

This is important because risk adverse investors will stick with safe investments which can guarantee them a low rate of return. I know for a fact that you cannot talk these people into investing in regular mutual funds and if you do then they are not going to be happy at all when it goes down in value. If, on the other hand, they had a variable annuity with a GMAB then they may be comforted to know they can get their money back after a set number of years.

Is paying an extra 1% that big of a deal? Think of it this way; if the average annuity costs the investor 2% a year they have 98% participation in the market. If they did nothing at all then they would have, as of right now, 3-4% total return in safe investment vehicles, including fixed and equity index annuities. Not to mention that several studies show that mutual funds loose between 2.5 and 5% of their total performance because they are taxable investments.

With variable annuities you are investing in sub-accounts and these sub-accounts hold less cash than your typical mutual fund. You have far less turnover rate than in traditional mutual funds and this means that you have lower internal expenses for trading the stocks and more money invested in stocks or bonds. This combined with the tax deferral and living benefits can make a variable annuity superior to mutual funds, especially for investors who are risk adverse.

I could not recommend anyone putting 100% of their assets into these products though. That makes no sense at all and can create significant issues down the road. I believe they are appropriate investments for those people who are looking to insure their riskier investments. We insure or homes, cars and our valuable possessions, but for some reason when we talk about insuring our investments the experts go nuts.

That is what we are talking about insuring your investment portfolio. The odds of you ever using your homeowners insurance are slim, but we always renew the policy. When we consider just over the last 10 years we have had several market hiccups and one really nasty, long bear market to think that it cannot happen again is crazy.

As a matter of fact the odds are high that we will suffer another bear market in the future. As we all know the market never goes straight up or down and that is what living benefits can help stabilize. If you are taking income from your portfolio a dramatic market downturn can create havoc with your income and negate your opportunity for a recovery. For some reason many experts who do not like variable annuities miss this important fact.

When they quote 10% a year from the S&P 500 they are never talking about the rate of return for people who are taking income from their portfolios. The fact is when you are taking withdrawals from your account and the market goes down it takes a long time for your account to recover, if it ever does. This important fact needs to be brought up again and again.

I have been reading several advice columns who criticize brokers for recommending variable annuities to investor whoa re about to retire. When we consider that these investment vehicles, Variable annuities, have guaranteed living benefits it makes sense to recommend a portion of the investment to go into a variable annuity. As we stated above, insuring a portion of your investments is not a bad idea. I am not advocating using 100% of your money to go into these products, but a portion of your money sure does make sense.

annuities, specifically variable annuities, are portrayed as villainous investment vehicles in the press. Unfortunately, you, the investor, are only given one side of the story. It seems as though financial writers are determined to give you “their” version of Variable annuities and how they work.

annuities in general, like all investment products, are not for everyone, but they have advantages that no other investment can offer. The fact that they offer guarantees is not reflected in financial writers’ articles. Because these writers do not like annuities, my guess is they do not fully understand them, and therefore always talk negatively about them. I, like most people, like facts and I am sure I could write an op-ed piece filled with the same flamboyant and ridiculous statements these people make and make you believe they are right for everyone. I will not do that. I will, however, give you the facts around variable annuities and dismiss the myths many people spread about them.

I can go on to list several other inaccuracies about variable annuities that have been written in articles lately, but I will refrain for the time being. I want to clear the air about these products and what they do and what they do not do. It is very easy to be negative on these products, mostly because there is little information publicly available on them. Annuity IQ tries to get the message out about the facts on Variable annuities.

Here we go, facts vs. fiction:

Pundits will have you believe that variable annuities are sold because of death benefits alone. This is a myth.

Fact: Most contracts are sold with living benefits attached to them and death benefit sales are actually dropping. I am assuming they understand the difference between living and dying.

Pundits say that withdrawals are taxed at ordinary income and can be taxed as high as 40%. They go on to say that the 15% capital gains tax is more favorable to investors, currently true. This is a myth.

Fact: Unless I missed something there is no 40% tax bracket. In order to be thrown into that high of a tax bracket, you would need over $150,000 worth of taxable income. Most people do not take lump sum distributions from their annuity. They take a stream of income and if the person itemizes their taxes, they will pay slightly more in income taxes than with capital gains tax. The current 15% capital gains tax rate on dividend is just that, current. Going forward I would expect to see that tax rate change, as it has over the last 20 years. Plus, they fail to examine the alternative minimum tax impact on distributions from mutual funds, which can affect your total income tax rate to begin with. In a nut shell, by not paying taxes on your investments until you withdraw money, you will save more money. If you believe what the pundits say, then we should all stop contributing to our IRA’s and 401 (k) plans because they are saying deferring taxes do not work.

Pundits go on to say that variable annuities have fees attached to them and they are good for nothing, except to make the insurance company money. This is a myth.

Fact: Yes, variable annuities have fees attached to them, so does every investment. What they fail to tell you is that these fees pay for guarantees on your annuity contract. The guarantees, more than likely, are for living benefits or possibly an enhanced death benefit. Every Annuity comes with a standard death benefit which guarantees your beneficiaries at least what you put into the contract minus any withdrawals. A living benefit can give you one of the following guaranteed streams of income (without annuitizing), a guaranteed minimum income benefit (usually requires annuitization), a guaranteed minimum withdrawal benefit (no annuitization) or a lump sum return of principal. All of this for about 1% more per year than the average A share mutual fund.

Pundits will say brokers sell variable annuities for the large commissions and therefore these are unsuitable investments. Mostly myth.

Fact: I agree some brokers sell variable annuities for commissions, just like some people hype how bad annuities are to sell more subscriptions. Let me put it this way, a variable annuity “”A” commission option”, on average; will pay 6.5% up-front commission. This is a one time commission paid, and no other compensation is ever given to the broker again. Let’s look at fee based planners. They charge on a percentage basis of your investment every year, usually 1.20% or so. That fee is on top of the mutual fund expenses and if you add it all together you are paying close to 2.3% for advice. You get no guarantees and you still have to pay the fee. To top it all off, over a 7 year time frame, that 1.2% fee will pay the advisor 8.4% in fees. So which product pays the highest commission again?

Pundits say that the market, historically, returns 10% per year and that the guarantees on variable annuities are worthless. I would consider this a big myth.

Fact: If the market returned 10%, a year we would all be rich. The market goes up and down and in cycles, currently a bull market. The fact is that some years the market has grievous returns and other years the market has great returns. How they get away with this is historically the market has averaged 10% per year. There is a big difference between average return and actual return. Plus, the average investor, since 1993, has averaged about a 4% rate of return in their investment portfolio. This happens because people tinker too much with their investments. Now, are the variable annuity guarantees worthless to investors? I ask them to ask that question to anyone who invested in 1999 to 2002 or to a beneficiary of a variable annuity who passed away during that time. I know what the answer will be and so do they, so they will not ask the question.

Considering a living benefit can offer the owner a steady stream of annual predictable income without annuitization, and the potential for market growth, I would say these benefits have plenty of advantages. Can a mutual fund give you steady predictable income? Can a mutual fund guarantee this money will last forever? Can a mutual fund guarantee you anything? The answer is no.

Pundits say that variable annuities tie up your money for too long. This is a myth.

Fact: You are usually allowed 10% withdrawals from your annuity per year, sometimes more, and the average deferred sales charge is 8 years. Investments, as a whole, are geared for long term growth with time horizons of between 5 and more years. Therefore, it would be fair to say that all investments tie up your money for a long period of time. Anyone who needs money invested for the short term should not move away from money market accounts. Also, selling an Annuity as a short term investment is misstating the facts of the product. Likewise anyone selling a mutual fund as a short term investment is misstating the facts, load or no-load alike.

Given America’s retirement crisis and the lack of pension funds in America, it is fair to say Americans need to save more money. What many writers do not take into account is the conservative nature of many Americans who want to invest, but are afraid of risk. These people are of no use to them and these people do not exist in their eyes.

This is where the variable annuity comes in and fits like a glove. I can invest in the market and the worst case scenario is I get my money back or a life-time of income. What a concept! It should be embraced not repelled. The baby boomer generation needs steady, predictable, guaranteed income to get them through retirement.

How do I know this? My parents, aunts and uncles are all boomers and are retiring now. They want the market exposure, without the risk and what better way to get them that than with a variable annuity. With a variable annuity they get predictable, sustainable income that does not have to be annuitized. Many of these writers are advising you to put all of your money at risk in the market or buy an immediate Annuity. Both of those options are only right for a very select few, not for the masses.

What I find astonishing, as I read many of the bios on financial writers, very few have actual financial services experience. They have never had to look a client in the eye and tell them the bad news that you have a loss or you don’t have enough to retire on Mr. Jones. They get to dish out advice to people they never meet, never talk to and have no responsibility for. Yet, they have the full authority to tell people what is right and wrong for their money, based on their opinions.

I wake up everyday and have the same routine. I put on my battle fatigues, face paint, Kevlar helmet and flak jacket, and head to my computer to see what new misinformation has been written about annuities.

OK, so maybe I am exaggerating a bit, but it made me sound more exciting than hearing about me pouring over prospectuses all day long. People who write these articles are not exactly reporting the truth, but offer more opinion pieces than anything else. I read annuity news every morning and everyday I lose more and more hair due to the stress of reading the next less than accurate portrait of variable annuities.

Everyday I read, everyday I write the authors, only once getting a reply back. Seriously, I have gotten one reply back in hundreds of emails I have sent. The person who wrote me back failed to make his point and actually misstated even more facts. The facts that he misstated were not even about variable annuities, it was the client’s age. Apparently if you are 56, you are a “senior” citizen. I find that offensive, and I am not even 56.

Either I have made my case so strong that they have no rebuttal, or they do not read their mail. I have a feeling it is simply human nature…not wanting to admit they are wrong or biased. If they will not write me back to support their argument or they do not like criticism, why write articles at all? It is my understanding that authors like to defend their work, yet I have found only one willing to do so, and the others…well, they ignore me.

I can and do handle criticism all the time, it goes with the territory. I must admit if their plan is to drive me crazy, it is working. My theory is that they cannot and will not defend their own statements, because they know they are wrong. Let’s examine some recent quotes.

“Withdrawals from annuities can be taxed at 40%” The Motley Fool.

“It often takes at least 15 years before the performance of your variable annuity will match the after-tax returns of investments in a taxable account. You’ll be tying up your money for a long time.” The Motley Fool

“Seniors, however, must endure tsunami-strength marketing pushes because variable annuities generate fat commissions, while immediate annuities do not.” Lynn O’Shaughnessy.

“OK, investors who bought annuities and then died within the next two months probably got their money’s worth. But currently only three out of every 1,000 variable annuities are surrendered due to death or disabilities, according to Limra International, an insurance-industry research group. And this report doesn’t even measure whether those four accounts were made whole by the death benefit!” Smart Money

“Now, if you’ve read all this and still want to buy an annuity, do yourself a favor and buy one with low costs and good investment options. These are available from mutual fund companies like Vanguard (average total expenses, 0.67%, including mortality and expense risk charges) and T. Rowe Price (0.79% average mutual fund expenses, plus an additional 0.55% mortality and expense risk charge). Investors who already own run-of-the-mill high-priced annuities should consider a tax-free transfer — called a 1035 exchange — to a better quality, low-fee Annuity. Just be sure to confirm that your surrender charges have expired before you make the switch.” Smart Money

And the list goes on and on. I did not even put in the lawyer websites who have no idea on how these products work and misstate even the basics of variable annuities, yet they promise big cash settlements.

As I review the quotes, I want to cry, not because I feel they are right, but because they are willfully misinforming the public and ignoring why people buy variable annuities to begin with.

Myth: People buy variable annuities for the death benefit.

Fact: People buy variable annuities for the tax deferral and living benefits.

Myth: Withdrawals will put you into the 40% tax bracket, stated above.

Fact: A 40% tax bracket does not exist, unless they factor in state income taxes. You would also need well over $150,000 in income to get into the 35% Federal tax bracket.

Myth: It takes 15 years for a tax deferred account, i.e. a variable annuity, to catch a taxable account, stated above.

Fact: There was no source given for this comment. It is ridiculous to say that a product that carries no up-front costs and has a 0 tax bill until you take withdrawals, will take longer to outperform than a taxable account. On mutual funds, win, lose or draw – you have a tax bill every year, period.

Myth: Immediate annuities pay a broker no commissions, as stated above.

Fact: Are you kidding me? Yes they pay commissions and they can pay as high as 4 or 5% commission. The commission can go directly to the broker and they will receive 100% of the commission. This means there is no split between the broker/dealer and the broker.

Example:

$100,000 immediate annuity pays 4% commission or it pays the broker $4,000, the whole $4,000. A variable annuity that pays 7% commission on the same $100,000 pays the broker a gross amount of $7,000. Now, minus out the broker/dealer haircut, usually about 60% and the broker only receives 40% of the $7,000 or $2,800. Who earns more from a sale?

Myth: Death benefits do not pay, unless you die in the first couple of months, stated above.

Fact: Again, are you kidding me? According to NAVA (National Association of variable annuities) from 2001 to 2003 the insurance industry paid out more than 2.8 billion dollars above account values for variable annuity beneficiaries. Plus, most people do not buy Variable annuities for their death benefits; they buy them for their living benefits.

Myth: “No-load” or low cost variable annuities are superior, stated above.

Fact: You get what you pay for. These products offer little benefits and only allow you to invest in their own funds. If you think that you are getting something for nothing, you are wrong. Would Vanguard offer a product that was not profitable for them? Yes, these products are great for tax deferral, but after that, well, read the review of Vanguard’s product that I offer for free.

All this misinformation is enough to drive the average investor nuts. The bottom line is this, people are buying these products, whether you agree or disagree. They are good products that meet the needs of the investor. What these writers fail to see is that if these products did not offer guarantees, then less people would invest their money where it is needed, in equities.

People are afraid of the market, and they should be after the 2000 to 2002 market correction, which was the worst correction we have seen in almost 70 years. The market is not for the faint of heart, and many people cannot handle a 10 or 15% drop in their account value. The question is; if your money is guaranteed could you handle a 10 or 15% drop in account value? The resounding answer is probably yes and that is the point.

The only thing that remains is which variable annuity is the best? Which variable annuity benefit fits your needs? When you buy a mutual fund, do you care about the Morningstar rating? If you answered yes to these questions, you are at the right site. These are the questions we answer and we rate these contracts and benefits. Its time to ditch the myths and get the facts, and I offer an open invitation to any of the financial writers to answer my emails or to contact me directly, contact me at scottdemonte@annuityiq.com.