Investors Must Avoid These Tax Mistakes

Approximately half of all financial advisers with Series 6 or Series 7 licenses and an insurance license are now recommending variable annuities for his or her clients, according to a new survey on variable annuities by AllianceBernstein and the Insured Retirement Institute (IRI).  Some financial advisers are pitching variable annuities as “guaranteed investments” with great features that include the possibility to get a “guaranteed lifetime withdrawal benefit.”

What You Need to Know

It is true that by investing in a variable annuity all potential gains generated in the “subaccounts” go untaxed —unlike most regular mutual funds. However, the crucial difference is that when investors eventually withdraw any gains from a variable annuity, all gains are taxed as ordinary income, not as long-term capital gains. Long-term capital gains are taxed at 15 percent and ordinary income can be taxed as high as 35 percent depending on the investor’s income.

Contact an Expert

The above is only one of the many flaws found in many variable annuities.  Investors should discuss with their financial adviser whether investing in mutual funds or other relatively safe investments would be more beneficial.