I consider variable annuities to be a bad choice for tax-deferred accounts because of the high costs involved, including the cost of the insurance component. If you’ve already maxed out other tax-deferred options (IRA, 401k) and feel that you must create an additional tax-deferred account, then you may decide to bite the bullet and accept the high charges as the price you pay for the tax deferral. You can reduce the cost by avoiding advisors/salespersons and buying the annuity directly from an issuer like Vanguard.

Otherwise, if you want a death benefit, you’re better off shopping around for life insurance and buying the most economical policy possible in the normal manner. If you want income, then invest your IRA money in an appropriate no-load fund such as a Ginnie Mae fund–and schedule your withdrawals in such a way that your account does not meet its demise before you do.

I’m well aware that commission-based advisors HATE this advice. Variable annuities are very lucrative for them because they’re loaded down with so many fees–up front, at surrender, and along the way–a portion of which go directly into their pockets. But from the consumer’s point of view, every penny of these fees is one penny (plus interest/dividends) less that will be available for retirement.

… but that’s only my personal viewpoint. If you’re a fan of variable annuities, simply because you see things differently, or perhaps because you’re in the business yourself, you’re certainly entitled to your opinion.

Ed Garrison
Executive Director
AAFR | American Association of Future Retirees

Thanks for the comments. I noted in my post that retirement planning IS NOT one of my areas of expertise. This is a guest post written by Ed Garrison. I’ll let Ed respond to your comment directly.

No offense but you do not understand finance well enough to make such a strong recommendation that Variable annuities do not belong in IRA’s. Just to give you a few examples, annuities in IRA’s provide living protection and death benefit protection for your IRA, eliminate the prospect of a step down in basis (guaranteed death benefit) and finally if owned in a Roth can provide income for life TAX FREE. An IRA is a someone’s largest asset and since ERISA has decimated the defined benefit plan clients must have an income stream that they cannot outlive in retirement. By the way you don’t pay any extra for tax deferral if you own it inside an IRA.

This generation of annuities is not your grampa’s! Please work with an investment professional. They can educate you on further estate planning usage of VA’s such as owned in the B trust etc…