Grover Ranz is a certified financial planner and a member of the Ark-La-Tex chapter of the Financial Planning Association, whose members contribute to this column weekly. If you have questions or topics you would like to see addressed in this space, send email to shreveportmoney@gannett.com.

Since entire books have been written about mutual funds and variable annuities, it obviously is a very complex subject. And it is impossible to explore all the data and information in a short article. But here are some questions and answers:

QUESTION: What is a mutual fund?

ANSWER: Mutual funds pool the money of people with similar investment goals. Mutual funds are run by managers who study and examine companies, securities and other investments searching for good investment opportunities for the fund’s shareholders. All mutual funds have an investment theme such as preserving capital, current income, long-term growth, growth and income, etc.

Q: What is a single-premium-deferred variable annuity?

A: This is an annuity issued by an insurance company to an individual making a single-premium payment. A variable annuity allows your money to be invested in a variety of “sub-accounts” that are similar to mutual funds. The objective is to get market performance in a tax-deferred vehicle.

Q: What are the differences in taxation of mutual funds and annuities?

A: First, there is a difference in how they are taxed if you invest non-qualified money. Non-qualified means you are investing money that is not in a qualified retirement plan like an IRA, 401(k), etc.

With a variable annuity, any growth in the value of the annuity will be taxed as “ordinary income” when you make a withdrawal (growth in annuities is tax-deferred until you withdraw funds). The IRS taxes this gain as LIFO — meaning last in, first out. So you pay tax on all of your gain in the annuity first until you withdraw your original cost-basis, which is not taxed.

With mutual funds, you are taxed each year on your dividends and capital gain distributions from the fund. But your increase in share price, if any, is not taxed until you sell your shares. If you have held the shares for a year or more, the gain is taxed as a long-term capital gain and has a cap of 15 percent unless you are in the 39.6 percent tax bracket, and then you are capped at 20 percent.

Annuities and mutual funds that are used in qualified retirement plans are both taxed as ordinary income when withdrawn or distributed. The ordinary income tax rates vary from 10 percent to 39.6 percent.

Q: I am retiring and want to roll over my 401(k) to an IRA account so I can begin monthly withdrawals. Should I invest in mutual funds or a variable annuity?

A: The answer is, it depends. Most studies show that you can reasonably expect a properly allocated portfolio to generate approximately 4 percent to 4.5 percent of income and potentially keep you from outliving your money.

Let’s compare a hypothetical mutual fund portfolio and a hypothetical variable annuity sub-account portfolio using 4 percent monthly income withdrawals with a $500,000 balance.

Let’s assume the mutual funds and the annuity sub-accounts are basically allocated the same way using a 50 percent stock and 50 percent bond allocation. You are withdrawing $20,000 per year or $1,666.66 per month from each portfolio. Let’s also assume that both portfolios average a gross performance of 7 percent per year for the next 20 years.

Now let’s compare the hypothetical value of these two portfolios using fees and expenses on the mutual fund portfolio of 1.5 percent per year and 3 percent per year on the variable annuity.

At the end of 20 years, using these hypothetical assumptions, the mutual fund portfolio has grown to $673,427.50. The variable annuity portfolio has declined to $408,953.47. The difference is the fees and expenses.

This is a hypothetical example using the above assumptions. But in the real world of investing, it may be close to reality. Investors need to weigh fees and expenses with the benefits they are purchasing.

Grover Ranz is a certified financial planner and a member of the Ark-La-Tex chapter of the Financial Planning Association, whose members contribute to this column weekly. If you have questions or topics you would like to see addressed in this space, send email

to shreveportmoney@gannett.com