FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeEasy
A client is comparing a deferred variable annuity with a mutual fund for long-term retirement savings. Which of the following is a primary advantage of the variable annuity over the mutual fund in this context?
- ATax-deferred growth of earnings.
- BGuaranteed principal protection.
- CLower expense ratios.
- DGreater liquidity and access to funds.
Show answer & explanationAnswer & explanation
Correct answer: A. Tax-deferred growth of earnings.
A primary advantage of a deferred variable annuity is the tax-deferred growth of earnings, meaning taxes on investment gains are postponed until withdrawal. Mutual funds, unless held in a tax-advantaged account, are subject to annual taxation on distributions and capital gains.
Why the other options are wrong
- B. Variable annuities do not typically offer guaranteed principal protection; their value fluctuates with underlying subaccounts.
- C. Variable annuities generally have higher expense ratios due to insurance charges, administrative fees, and subaccount expenses.
- D. Variable annuities are less liquid than mutual funds, often subject to surrender charges and penalties for early withdrawals.
Variable Annuity Tax Deferral
The earnings within a variable annuity grow tax-deferred, meaning taxes are not paid until funds are withdrawn, allowing for greater compounding.
- Earnings grow tax-deferred
- Taxes paid upon withdrawal
- Applies to investment gains
- Contrast with taxable mutual fund distributions
Memory trick: Annuity's 'tax-deferred' growth is a big 'refer'ral.