Which characteristic is shared by both fixed and variable annuities?

Which characteristic is shared by both fixed and variable annuities?

• A. Tax-deferral of earnings
• B. Tax-deductible contributions
• C. A variable rate of return
• D. A fixed rate of return

Answer: (A)

The correct choice is the tax-deferral of earnings, as both fixed and variable annuities allow the investment growth to accumulate without immediate taxation. This feature enables the investor to defer taxes on earnings until withdrawals are made, which can be beneficial for long-term savings strategies and retirement planning. Tax deferral helps in maximizing the growth potential of the annuity since the earnings can compound without the drag of taxes. In fixed annuities, the earnings are typically earned at a guaranteed interest rate, while in variable annuities, the returns are based on the performance of selected investments, but the tax-deferral characteristic remains applicable in both cases. This fundamental aspect is what gives both types of annuities a similar tax advantage, making it easier for individuals to save for retirement over time without incurring annual tax liabilities on their investment earnings.

The correct choice is the tax-deferral of earnings, as both fixed and variable annuities allow the investment growth to accumulate without immediate taxation. This feature enables the investor to defer taxes on earnings until withdrawals are made, which can be beneficial for long-term savings strategies and retirement planning. Tax deferral helps in maximizing the growth potential of the annuity since the earnings can compound without the drag of taxes.

In fixed annuities, the earnings are typically earned at a guaranteed interest rate, while in variable annuities, the returns are based on the performance of selected investments, but the tax-deferral characteristic remains applicable in both cases. This fundamental aspect is what gives both types of annuities a similar tax advantage, making it easier for individuals to save for retirement over time without incurring annual tax liabilities on their investment earnings.