`It Was the Best of Times, It Was the Worst of Times.'

Hargrave, Stanley E.
June 1998
Journal of Financial Planning;Jun98, Vol. 11 Issue 3, p30
Academic Journal
This article presents the results of a study conducted by Price Waterhouse for the National Association for Variable Annuities on the effects of the 1997 Taxpayer Relief Act in the U.S. on the after-tax performance of variable annuities (VA) compared with mutual fund investments, as of June 1998. The annuity buyer is assumed to be in a higher tax bracket during the accumulation years, and falls into a lower tax bracket during the distribution years. Redemption fees or back-end charges are ignored because VA buyers are long-term investors. Therefore, over a long time period, those charges are irrelevant. Mortality and expense charges are calculated according to their weighting against the assets they apply to. Mutual fund owners are assumed to sell 20 percent of their holdings each year and purposely incur the appropriate tax penalties. The VA owner, in one column of each table, is assumed to annuitize his account for a lifetime payout, while the mutual fund owner tries to do the same through a very tax-disadvantaged procedure. The fund owner is assumed to liquidate his entire account, pay the appropriate taxes and then buy the same immediate annuity with the remaining proceeds before the break-even period can be calculated. Finally, future returns are assumed to be the same as returns over the past ten years, rather than a longer and more conservative time period.


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