Variable annuities, which sell like hotcakes, but which I’ve suggested many times before are not such a great buy, have become a somewhat even less great buy — as one might have guessed they would, as a capital-gains tax cut had been hanging in the air for some time. They are an inadvertent means of converting what would otherwise be lightly taxed long-term gains (if you just held some growth stocks or an index fund) into more heavily taxed ordinary income as you withdraw the money. Now, with the lower capital gains rate, that’s even more of a drawback.

Why pay a built-in sales commission, along with a management fee and a life insurance fee, only to lock yourself into a variable annuity manager who may or may not do a great job but who will, in any event, wind up providing you with fully taxable money at the other end, 10 or 20 years from now when you want to spend it?

For those of you already in such investments, don’t feel bad: you did the right thing by saving money in the first place. That’s the big issue, even though I do frankly think you could have done even a little better just buying a couple of index funds on your own.


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