Tax Law Crimps VAs

Physician's Money Digest, October31 2003, Volume 10, Issue 20

No amount of number crunchingseems to deter investors in variable annuities(VAs) or the commission-hungrybrokers who push them. Lured by tax-deferredgains, some investors are stillbuying VAs, even when faced with evidencethat the average 2.3% expenseratio of VAs, compared with 0.18% for alow-cost 500 Index fund from Vanguard,will cost them money in the long run. Thenew tax law, which cut the maximumlong-term capital gains tax to 15%, maydo the trick, however. Withdrawals fromVAs will be taxed at ordinary incomerates, instead of the new lower capitalgains rates that would apply if you cashedin mutual fund shares. That would turnthe race between an already superiorlong-term mutual fund gain into a rout.