A self-directed or “variable” annuity combines the investment power of no-load mutual funds with tax deferral. Unless you invest in a mutual fund inside a tax-sheltered retirement plan, you’ll owe income tax immediately on every dividend. That’s true even if you reinvest all of your dividends, as most mutual fund investors do.
What’s more, if you switch from one fund to another that’s considered a sale by the IRS. If you have a profit on the fund you switch from, you’ll owe income tax.
– It’s possible to invest in mutual funds and not owe current income taxes
One way to do so is to invest in variable annuities. In essence, you can control the timing of your mutual fund taxation.
– With variable annuities, you can choose to have your premiums invested in mutual funds.
Often, there’s a stock fund, a bond fund, and a money market fund. These funds are open only to contract holders, but they’re often managed by the same people who run conventional mutual funds.
You can’t actually lose money because variable annuities guarantee that your beneficiaries will receive the amount you invest or the amount in your account, whichever is greater. Moreover, variable annuity accounts don’t go through probate.
Some variable annuities accept one large single-premium; others accept a stream of premiums, with you deciding how much to invest.
– Only invest in a variable annuity if you can leave the money in there for at least five years
Most annuities have a withdrawal charge that vanishes after five years or so. Also, you’ll owe a 10% penalty tax to the IRS on money you withdraw before age 59.5.
Connect with us today to discuss how you can invest with tax-free mutual funds using self-directed annuities; we’ve got answers for you!
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