The Importance of Holding a Variable Annuity for Tax Deferral

A

The correct answer to the question is A. Long-term investment.

A variable annuity is a type of investment vehicle that offers tax-deferred growth potential. The owner of the annuity invests in sub-accounts that are similar to mutual funds, and the value of the annuity varies based on the performance of these sub-accounts. Variable annuities typically come with higher fees and expenses than other investment options, such as mutual funds or exchange-traded funds (ETFs).

The benefits of tax deferral can be significant over the long-term, as the money invested in the annuity grows tax-free until it is withdrawn. This can lead to substantial savings in taxes over time, particularly for high-net-worth individuals who are in higher tax brackets. However, in order for the benefits of tax deferral to outweigh the costs of a variable annuity, the investor must hold the investment for a sufficient period of time.

If an investor only holds a variable annuity for a short period of time, the benefits of tax deferral may be minimal, and the costs of the annuity may outweigh any potential tax savings. Additionally, if an investor needs access to their funds before the annuity's surrender period has ended, they may face significant fees and penalties.

A variable annuity is not a credit-risk investment, as the underlying assets are typically invested in a diversified portfolio of stocks and bonds. While variable annuities are a type of annuity investment, not all annuities offer the same tax-deferred growth potential as variable annuities.

In summary, the benefits of tax deferral will outweigh the costs of a variable annuity only if the investor holds it as a long-term investment. It is important for investors to carefully consider the fees and expenses associated with a variable annuity and to evaluate whether the potential tax savings outweigh these costs over the long-term.