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Make Variable Annuities a Part of Your Tax‑Efficient Strategy
High-income clients have limited options for tax-advantaged accounts. Consider a variable annuity that provides tax-deferred growth and a guaranteed stream of income.1
Power of Tax Deferral
Tax deferral can help your clients’ portfolios grow faster—even after taxes.
Years for an Investment to Double
Assumed preretirement tax rate: 35%—post‑retirement tax rate: 20%
Hypothetical chart assumptions: all returns are assumed to be fully taxable as ordinary income (no capital gains or other returns) and does not include any costs inherent in the deferral vehicle.
Who Can Benefit from Tax Deferral?
Use these indicators to assess clients' tax exposure:
Ten years or more until retirement
The longer the money is invested, the greater the benefit from tax deferral and compounding.
Assets largely held in taxable accounts
Affluent clients with assets in taxable accounts may benefit from tax deferral because of their typically higher marginal income tax rate.
Income tax subject to high marginal rates
In general, this affects investors in the top three federal income tax brackets (currently 33% and above) and those with high state and local taxes.
Lower anticipated income taxes in retirement
As an example, retirees may incur lower tax rates or may move to a state with lower taxes (assuming they do not withdraw assets before retirement).
Significant exposure to highly tax-inefficient assets
Tax-inefficient assets tend to deliver most or all of their total returns from investments that are taxed at a relatively high rate.
Tax-Efficient Investments
Help your clients keep more of their investment earnings by choosing investments that are more tax efficient.
Higher Tax Efficiency
- Equity index funds (other than REITs)
- Equity index ETFs (other than REITs)
- Equity income ETFs†
- Tax-managed equity funds
- Equity separately managed accounts
Medium Tax Efficiency
- Bond funds with large U.S. Treasury allocations††
- Typical actively managed equity funds
- Equity income funds†
Lower Tax Efficiency
- High-turnover equity funds
- Mortgage bond funds
- Corporate bond funds
- Leveraged loan/floating rate bond funds
- U.S. high-yield bond funds
- Emerging-market bond funds
The relative tax efficiencies of these investments are generalizations and are not universally accurate. Each investment should be considered individually for the benefits of being held in a taxable or tax-deferred account.
† Equity income funds and ETFs typically distribute most of their income in the form of qualified dividends, which for many taxpayers are taxed relatively lightly, allowing most equity income funds to be considered high tax-efficiency investments. However, for higher-income taxpayers, qualified dividends are subject to taxation at a rate of either 18.8% or 23.8% (including the Medicare surtax on investment income), which may make them less efficient for those investors.
†† Applies to investors who are subject to high rates of state/local taxes on investment income; for other investors, these bond funds should be considered as having lower tax efficiency.
Explore More Insights and Resources
- * The tax information contained within the Tax Information Center is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or a tax professional regarding your specific legal or tax situation.
- 1. Investing in a variable annuity involves risk of loss. Investment returns and contract value are not guaranteed and will fluctuate.
- There may be tax consequences for moving assets into an annuity, as well as changes to your client's asset allocation profile. Before investing in an annuity, there are a number of factors that need to be reviewed with a licensed agent to determine product suitability. In addition to tax efficiency, there are other important considerations to take into account.
- It is important to keep in mind that with a variable annuity, all gains are taxed as ordinary income upon withdrawal and a 10% IRS tax penalty may apply to withdrawals taken prior to age 59½. Also, unlike with a taxable account, your client is subject to an annual annuity charge.
- Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or a tax professional regarding your specific situation.
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