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

 
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