4:24PM Fri. Aug. 7, 2020 Eastern -- US Markets Open in 17 hours and 6 minutes

Max's Investment World Stock Market Challenge

Variable Annuities--Not Right for Everyone

Keeping Uncle Sam away from your portfolio is all the rage these days as more and more people set up and add to Individual Retirement Accounts (IRAs) or defined contribution plans set up by employers--known as 401(k) accounts.

Nearly as popular are variable annuities, which also allow investors to defer taxes on investments. While putting the most you can into an IRA or 401(k) plan is clearly a no-brainer, getting into variable annuities definitely requires some thinking.

In the first place, a lot of people don't understand variable annuities, violating the first rule of prudent investing: know what you are getting into. The goal of setting up a variable annuity is to defer paying taxes until you are older, usually after you retire. At that time, you probably will move into a lower tax bracket, thereby paying less tax on your investments. Insurance and mutual fund companies sell variable annuities to individuals who contribute money just as they would to an IRA or 401(k) plan. The companies then take the money and give it to money managers who invest it in stocks, bonds and other assets.

After some time, usually upon retirement, the individual cashes in. The pay out is made over a certain period of years during which taxes are paid. The amount of the payment, as the name implies, is variable and dependent on the performance of the investments. In addition, variable annuities offer heirs a death benefit, just life insurance.

You should only consider variable annuities if you have maxed out on your IRA and 401(K) contributions and still need and want to get out of paying current taxes on dividends and interest income from your stocks, bonds and mutual funds. Oddly enough, many people buy variable annuities even though they have not done this.

Variable annuities often have higher expenses than mutual funds. They usually charge sales fees, annual maintenance fees and surrender charges, which are incurred if the investor wants to cash in early. Indeed it takes six to seven years for an annuity to start becoming cheaper than investing in a regular (read taxable) mutual fund.

But no-load mutual fund companies, such as Vanguard and T. Rowe Price, have been aggressively getting into the market and are expanding their market share by offering lower annual fees.

Bottom line: if you do want and need a variable annuity, look for those with low expense ratios and good performance over five years. Morningstar and other firms keep such data.

Go to $Idea Central for more investment ideas!

Help | User Agreement | Privacy Policy

Winning Tips


$Idea Central

Top 10 Standings
(Players with the highest percentage returns this week as of August 7, 2020. For monthly and long-term standings, click here.)

Name Percentage Gain
JackD 99.10%
jackd 99.10%
x13golf 97.26%
okokokok 96.82%
Sofia 96.69%
sofia 96.69%
dsilve 96.23%
brannlemm 95.04%
bclark15 94.14%
Mcbangbang 94.05%
Standings are based on the overall portfolio value calculated at the end of each trading day.


Your Portfolio
Your Transactions
Private Competitions
Tell A Friend
Reset Your Portfolio
Update Account Info
Contact Us
Log Out
Partners / Licensing

Stock symbol:

Symbol Lookup
All Active Stocks
Common shares:
Mutual funds:

Hot Stocks
MSFT: Microsoft Corporation $216.35
IBM: International Business Machines $126.12
INTC: Intel Corporation $48.57
CSCO: Cisco Systems, Inc. $47.77
ORCL: Oracle Corporation $55.28
AAPL: Apple Inc. $455.61
PFE: Pfizer, Inc. $38.27
XOM: Exxon Mobil Corporation $43.64
GE: General Electric Company $6.33
JPM: JP Morgan Chase & Co. $97.24