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Variable Annuities

A variable annuity is a form of retirement savings vehicle that may be beneficial for some people. Annuities are effective for those who need to put aside more money for retirement and are in a high federal tax bracket. They are also suitable for people who have minimal retirement assets compared to their non-retirement assets. Annuities should be considered only after all other tax-deferral methods, such as IRAs, 401(k)s and 403(b)s, have been funded to the maximum.

No-load variable annuities are the vehicle of choice in this category. Avoid variable annuities that carry high front-end commissions, high annual fees (due to the mortality and expense charges), and high surrender charges.

The performance of the underlying mutual funds inside the annuity must also be reviewed. Some funds perform below their category averages before fees, and much below the averages after the associated fees have been considered.

Distributions from variable annuities are taxed at ordinary income tax rates, unlike regular taxable investments that limit capital gains taxes to 20% or less. Variable annuities are long-term investments, so consider their benefits and constraints carefully before investing.

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