Fixed Annuities Vs. Mutual Funds
Fixed annuities are a type of insurance contract, while mutual funds are portfolios of investments. Although you can buy annuities and mutual funds through licensed representatives at your bank, neither of these investments are federally insured. Investment firms and insurance companies offer investors a variety of fixed annuities and mutual funds with different features and benefits, but both of these investment types have pros and cons.
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Principal Protection
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When you buy a fixed annuity, the insurance company that issued your contract pays a fixed rate of interest on your lump sum premium payment. Your account value does not fluctuate, although you could lose money if the insurance firm becomes insolvent.
When you buy a mutual fund, you must submit a buy order before the stock market closes for the day; however, mutual funds are sold after the market closes and share prices are based on the closing value of the underlying securities. Consequently, mutual fund prices are subject to change and you do not know how much your shares will cost when you submit your buy order.
Fees
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There are different classes of mutual funds, but basically mutual fund share classes fall into three broad categories: front load, back-end load and no-load. Loads are commission that you pay to trade shares. On front-load shares, you pay the commission when you buy the shares; whereas you pay the commission when you sell back-end load shares. You pay no commission to buy or sell no-load shares. However, in addition to load fees, you also pay annual operating expenses regardless of the share class that you own.
You typically pay no fees to buy a fixed annuity, although you usually pay an interest penalty fee if you withdraw your funds before the annuity term ends.
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Liquidity
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You can sell mutual fund shares any day that the stock market operates, and it normally takes at least three days for you to receive your money. You receive a sum equal to the value of your shares on the day of the sale.
Most fixed annuity contracts include a money-back guarantee that enables you to receive a refund of your premium at any time. However, fixed annuities, like certificates of deposit, have terms times that usually last for at least four years. You have to hold the annuity to the end of the term to access your principal and interest without penalty.
Taxes
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Fixed annuities are tax-deferred products which means you do not pay taxes on your interest until you make a withdrawal. You can further delay paying taxes when your annuity contract ends by rolling the funds into another annuity or life insurance contract.
You must pay taxes on dividend income from mutual funds, as well as capital gains tax on realized gains. However, earnings on mutual funds held in a 401k or a retirement account grow on a tax-deferred basis in the same manner as annuities.
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