In a non-tax deferred account , when you buy individual stocks, you pay no capital gains tax until you sell your shares.

Not so with a mutual fund.  Every time the fund sells a stock for a profit, you must pay tax on your share of the profit, even if you have not received any distribution.

The gain incurred by the fund may be a long-term capital gain (taxed at federal rates up to 20%) or the fund may have short-term capital gains (taxed up to 39.6% as ordinary income).

Each year you receive a 1099 form to report on your tax return and you pay taxes on these gains (in addition to the dividends).


Her’s another irritation – these taxes are even higher in years when the market falls and fund investors create net redemptions in the fund.

When several fund shareholders want to sell than buy (which usually happens when the market is falling and investors get scared), the fund will sell its holdings in order to create cash to pay the selling shareholders.

These sales by the fund of its stocks often create capital gains and these will be reflected on your 1099.

So in years when you watch your fund decline in value, you may also get the biggest tax bill!


Here is an option.

Often Investors say I can beat capital gains.  I will purchase a Variable Annuity. They have fund manages who manage the sub-accounts of a variable annuity.  These sub-accounts can contain equity holding similar to mutual funds, but the two products are not comparable.

Before you decide to buy a variable annuity, consider the following questions;

•  Will you use the variable annuity primarily to save for retirement or a similar long-term goal?

•  Are you investing in the variable annuity through a retirement plan or IRA (which would mean that you are not receiving any additional tax-deferral benefit from the variable annuity)?

•  Are you willing to take the risk that your account value may decrease if the underlying mutual fund investment options perform badly?

•  Do you understand the features of the variable annuity?

•  Do you understand all of the fees and expenses that the variable annuity charges?

•  Do you intend to remain in the variable annuity long enough to avoid paying any surrender charges if you have to withdraw money?

•  If a variable annuity offers a bonus credit, will the bonus outweigh any higher fees and charges that the product may charge?

•  Are the features of the variable annuity, such as long-term care insurance, something that you could purchase less expensively separately?

•  Have you consulted with a tax advisor and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement?

•If you are exchanging one annuity for another, do the benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your money before the end of the surrender charge period ofor the new annuity?


Remember:  Before purchasing a variable annuity, you owe it to yourself to learn as much as possible about how they work, the benefits they provide, and the charges you will pay.

We will give you a free report on your Variable Annuity.

A feature of Variable Annuities is that income and capital gains are not taxable to the owner until the annuity is either surrendered or periodic payments are taken.  At that point the owner will be subject to capital gains tax or income tax at the then current tax rates.

There is also a tax benefit exclusive to annuities when annuitized.  Of each payment, the IRS considers a part of your periodic payments return of your original investment, which is not taxed, and part is you gain, taxed at ordinary rates.

Note that withdrawals prior to age 59 ½ are subject to a 10% IRS penalty.

Variable annuities have mortality, expense and surrender charges and mutual funds may have redemption costs.

Variable annuities have a death benefit.  Withdrawals of interest are taxed as ordinary income.

This is not a comprehensive discussion of tax issues and you should consult a tax advisor.


Both return and principal values of mutual funds and variable annuities will fluctuate, and they may be worth more or less than their original costs when redeemed.

Variable annuities and mutual funds involve investment risk, including possible loss principal.

Withdrawals and under-performance of its sub-accounts will have the effect of decreasing cash values and the death benefit.

Withdrawals in excess of the cost basis will be taxable.


Variable annuities and mutual funds are sold by prospectus, which contains more complete information including risk factors, fees, surrender charges and other costs.

You should obtain a prospectus from your financial representative.

Please read the prospectuses carefully before you make a purchase or invest.


So there is a trade-off of avoiding taxes each year yet potentially paying a higher tax later.

Additionally, variable annuities provide a death benefit, which carries a cost.

There are additional advantages and disadvantages beyond taxation to owning a variable annuity versus mutual funds.

The only way to determine if a variable annuity would be a savings for you is to look at your individual situation and see if it makes sense to look at a variable annuity as an alternative to mutual funds.

We are happy to provide such an analysis at no charge and with no obligation.  Send us an email to request your Variable Annuity Report.