Before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Investing in a variable annuity involves risk of loss - investment returns and contract value are not guaranteed and will fluctuate.
Fidelity Personal Retirement Annuity (Policy Form No. DVA-2005, et al.) is issued by Fidelity Investments Life Insurance Company, 100 Salem Street, Smithfield, RI 02917, and, for New York residents, Personal Retirement Annuity (Policy Form No. EDVA-2005, et al.) is issued by Empire Fidelity Investments Life Insurance Company®, New York, N.Y. FILI is licensed in all states except New York. Fidelity Brokerage Services, Member NYSE, , and Fidelity Insurance Agency, Inc. are the distributors. The contract's financial guarantees are solely the responsibility of the issuing insurance company.
This material should not be considered tax or legal advice. You should consult a tax and/or legal advisor for your specific situation.
Before purchasing a deferred variable annuity, there are a number of factors that need to be reviewed with a licensed agent to determine product suitability. In addition to tax efficiency, there are other important considerations to take into account. Variable annuities are generally not suitable for investors with time horizons of less than 10 years, as in most cases there is little to no advantage over a taxable account for the first 10 years.
According to 12/31/15 data on non-group open variable annuities from Morningstar, Inc., at 0.25% Fidelity Personal Retirement Annuity's annual annuity charge is significantly lower than the national industry average 1.25% annual annuity charge. Underlying fund fees also apply.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Equity investments involve more risk because their value will fluctuate according to their performance. Bond prices rise when interest rates fall, and vice versa; the effect is usually more pronounced for longer-term securities. High-yield funds may invest in lower-quality securities, which generally offer higher yields, but also carry more risk. Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry, which may affect the fund. Non-diversified funds that focus on a relatively small number of stocks tend to be more volatile than diversified funds and the market as a whole.
Fidelity Annuity Specialists are licensed insurance agents.
Details on Locating Assets for Tax Efficiency in Above Video
The relative tax efficiencies of these investments are generalizations and are not universally accurate. Each investment should be considered individually for the benefits of being held in a taxable account or tax-deferred account.
Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty.
Variable annuities have fees not found in taxable accounts, that will impact returns.
Equity Income Funds typically distribute most of their income in the form of Qualified Dividends, which for many taxpayers are taxed relatively lightly, allowing most Equity Income Funds and ETFs to be considered High Tax Efficiency investments when compared with other investment options that generate taxable income. However, for higher income taxpayers, Qualified Dividends may be subject to both a higher tax rate and also the Medicare surtax on investment income, which may make them less efficient for those investors.
Bond Funds with Large U.S. Treasuries allocations are considered to be Medium Tax Efficiency for investors who are subject to high rates of state/local tax on investment income; for other investors, these bond funds should be considered Lower Tax Efficiency.
Details on Hypothetical Examples Used in Above Video
These hypothetical examples are not intended to predict or project investment results. Your actual results may be higher or lower than those shown here. Assumptions include: $100,000 investment, 20 year time horizon, 0.25% and 1.25% annual annuity charges for the low-cost and industry average tax-deferred variable annuities (VAs), respectively, marginal federal ordinary income tax rate of 36.8% (33% ordinary income tax plus 3.8% Medicare surtax) for the entire period, and a 6% annual rate of return (equivalent to 5.74% and 4.68% net annual rates of return for the low-cost and industry average VAs, respectively) with the gain assumed to derive entirely from income (characterized for tax purposes as ordinary income). Investments that have the potential for a 6% annual rate of return also come with the risk of loss. This rate of return is not guaranteed.
* The year-by-year pre-tax account values for the low-cost VA at the 5.74% and -0.25% (0% less 0.25% annual annuity charge) net annual rates of return shown above are: $105,735/$99,750 for year 1, $111,799/$99,501 for year 2, $118,211/$99,252 for year 3, $124,990/$99,004 for year 4, $132,158/$98,756 for year 5, $139,737/$98,509 for year 6, $147,751/$98,263 for year 7, $156,225/$98,017 for year 8, $165,184/$97,772 for year 9, $174,658/$97,528 for year 10, $184,674/$97,284 for year 11, $195,265/$97,041 for year 12, $206,464/$96,798 for year 13, $218,305/$96,556 for year 14, $230,824/$96,315 for year 15, $244,062/$96,074 for year 16, $258,059/$95,834 for year 17, $272,859/$95,594 for year 18, $288,507/$95,355 for year 19, and $305,053/$95,117 for year 20, ($305,053 comes to $229,594 after federal income taxes have been deducted; since there is no gain at a 0% rate of return, income taxes are not applicable).
The year-by-year pre-tax account value for the industry average VA at the 4.68% net annual rate of return is: $104,675 for year 1, $109,569 for year 2, $114,691 for year 3, $120,053 for year 4, $125,665 for year 5, $131,540 for year 6, $137,689 for year 7, $144,126 for year 8, $150,864 for year 9, $157,917 for year 10, $165,300 for year 11, $173,028 for year 12, $181,117 for year 13, $189,584 for year 14, $198,447 for year 15, $207,724 for year 16, $217,436 for year 17, $227,601 for year 18, $238,241 for year 19 and $249,379 for year 20.
The year-by-year post-tax account value for the taxable account at a 6% rate of return shown above is: $103,792 for year 1, $107,728 for year 2, $111,813 for year 3, $116,053 for year 4, $120,453 for year 5, $125,021 for year 6, $129,762 for year 7, $134,682 for year 8, $139,790 for year 9, $145,090 for year 10, $150,592 for year 11, $156,303 for year 12, $162,230 for year 13, $168,381 for year 14, $174,767 for year 15, $181,394 for year 16, $188,272 for year 17, $195,411 for year 18, $202,821 for year 19, and $210,512 for year 20.
State and local taxes, and fund and transaction fees were not taken into account; if they were, performance would be lower. These examples also do not take into account capital loss carry forwards or other tax strategies that could be used to reduce taxes that could be incurred in a taxable account; to the extent they apply to your situation, the comparative advantage of the variable annuity would be diminished. Lower tax rates on capital gains, dividends, and interest income would make the taxable investment more favorable. Changes in tax rates and tax treatment of investment earnings may impact the comparative results. Consider your current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors.
In the taxable account, it is assumed taxes incurred on the income are paid annually from the income itself, with the remainder reinvested. For the VA, it is assumed that all income—less the 0.25% annual annuity charge—is reinvested. In the pre-tax VA, it is assumed the investor has not taken any withdrawals and all taxes continue to be deferred. In the post-tax VA, it is assumed that the investor liquidates the VA at the end of the time period, and pays taxes on the gain out of the proceeds. If the assets in the VA were liquidated entirely in one year, its proceeds may increase the tax bracket to the marginal federal income tax rate of 43.4% (39.6% ordinary income tax plus 3.8% Medicare surtax), which would minimize and potentially eliminate any savings of the VA. To avoid this, the VA would need to be liquidated over the course of several years or annuitized, which would lengthen the deferral period.
Please note that while a proxy for a fund in a taxable account may be available in a VA, it will almost certainly not be exactly the same fund and therefore the pretax, pre-fee returns will differ, potentially by a significant margin. In addition, keep in mind that any funds sold in a taxable account may be subject to capital gains taxes if they have appreciated above their cost basis. This should be taken into consideration when considering selling funds from a taxable account to fund an annuity. Finally, please note that tax efficiency may also be achieved by holding the funds in an IRA, or by investing in funds in the same family that are managed for tax efficiency.
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