Vanguard tax deferred account

[zack59]

Vanguard has from how I understand it has an annuity where you add funds and can invest it in a number of funds tax deferred. It appears to work like an IRA.
Funds can be withdrawn, taxes at ordinary income would be due if a gain.

Any opinions as to the downsides if looking for additional tax deferred accounts?

[braumeister]

Sounds like you need to read the prospectus very carefully.

[pb4uski]

Another thing to keep in mind is that annuity withdrawals are taxed differently from other investments.... let's say you put in $1 million and it grows to $1.5 million.

In a nondeductible IRA, if you take out $100k, it is $33k of ordinary income and $67k of basis.

In an annuity, the first $500k withdrawn would be ordinary income and any amounts withdrawn after income is exhausted would be principal... so a $100k withdrawal would be $100k of income for the first 5 years and $0 income thereafter.

At the end of the day both are tax deferred and only the $500k of growth is taxed but the timing is very different.

[upset264]

I (we) have two annuities with Vanguard. Both are the "Vanguard Variable Annuity" wherein you choose your investments very much like with mutual funds. I am well satisfied with these accounts.

One is my wife's and she and I are joint annuitants. The other was my fathers on which I was beneficiary. He passed away in 2016 and I am now receiving periodic payments under the stretch distribution option which functions very much like traditional IRA distributions. Each year the account value is divided by a factor based on the beneficiary's age to determine the required minimum distribution. Prior to the introduction of the stretch option the beneficiary was required to withdraw the entire account balance within five years of the owners death.

As stated above, withdrawals are taxed as ordinary income in the year taken until you get down to the cost basis. Distributions of the cost basis are not taxed. Prior to taking any distributions there are no taxable events. No interest or dividends to report, no 1099 forms.

[Fired Up]

Besides how withdrawals are taxed, there is a significant difference in fees. For instance Vanguard Total Stock Market Mutual fund return minus expense for the last 12 months was 25.21%, similar fund offered in a Vanguard Variable Annuity (VVA-Ttl Stock Market Idx) was 24.64%. Note the expense ratio for the Mutual Fund (Admiral Shares) is .04%. So you are being charged about .57% every year to have these funds inside the Variable Annuity. Those fees add up quickly, do your own analysis to see if an after tax account would make more sense in the long run. In summary for me, it makes more sense to hold the funds outside of an annuity, as I do not plan or need to annuitize the funds in the future. Almost forgot, if the funds are held outside the annuity, if held long enough they are long term capital gains and thus a lower tax rate. Annuity is at ordinary income and losses can not be used to offset gains.