TAXATION
Contributions made to an annuity are made with after-tax dollars. The money the investor deposits becomes the investor's cost basis and is allowed to grow tax-deferred. When the investor withdraws money from the contract, only the growth is taxed. The investor's cost base is returned tax-free. All money in excess of the investor's cost base is taxed as ordinary income.
SALES CHARGES
There is no maximum sales charge for an annuity contract. The sales charge that is assessed must be reasonable in relation to the total payments over the life of the contract. Most annuity contracts have back-end sales charges or surrender charges similar to a contingent deferred sales charge.
VARIABLE ANNUITY VS. MUTUAL FUND
|
Variable Annuity |
Mutual Fund |
|
|
Maximum sales charge |
No maximum |
8.5% |
|
Investment adviser |
Yes |
Yes |
|
Custodian bank |
Yes |
Yes |
|
Transfer agent |
Yes |
Yes |
|
Voting |
Yes |
Yes |
|
Management |
Board of managers |
Board of directors |
|
Taxation of growth and reinvestments |
Tax-deferred |
Currently taxed |
RETIREMENT PLANS
For most people, saving for retirement has become an important investment objective for at least part of their portfolio. Investors may participate in retirement plans that have been established by their employers, as well as those they have established for themselves. Both corporate and individual plans may be qualified or nonqualified, and it is important for an investor to understand the difference before deciding to participate. The following is a comparison of the key features of both types of plans:
|
Feature |
Qualified |
Nonqualified |
|
Contributions |
Pre-tax |
After-tax |
|
Growth |
Tax-deferred |
Tax-deferred |
|
Participation must be allowed |
For everyone |
The corporation may choose who gets to participate |
|
1RS approval |
Required |
Not required |
|
Withdrawals |
100% taxed as ordinary income |
Growth in excess of cost base is taxed as ordinary income |
