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Annuities as an Asset Class for Fee-Based Advisors l 14 © Envestnet 2022 Annuities for Accumulation For retirement income, the discussion of annuities naturally tends toward using them for systematic payouts in retirement, either for a lifetime or for a fixed period. However, through their ability to provide tax deferral for gains, annuities can also be used as pure accumulation tools. Though every annuity, by definition, must include a means to convert into a guaranteed income stream, this is not the priority when used for accumulation. Owners may plan to eventually have the lump-sum contract value returned after it has provided tax deferral. Chapter 10 dives deeper into the tax aspects of annuities. Deferred fixed annuities (DFAs), or multiyear guaranteed annuities (MYGAs), are the annuity equivalent of holding CDs or other shorter-term fixed-income investments to a targeted maturity date. Their objective is to seek competitive after-tax fixed income returns for assets. This may be possible through their principal protection and lack of interest rate risk (they do not lose value when interest rates rise) and their tax deferral. Fixed index annuities (FIAs) can also be used in a similar manner. We discuss FIAs later with an optional lifetime withdrawal benefit included. But when such benefits are not included, FIAs can be treated as another alternative to a taxable bond portfolio providing principal protection, tax deferral, and some exposure to market upside which could make them competitive with the after-tax returns on bonds. A low-cost deferred variable annuity may also be used for tax deferral rather than thinking of it as a source for lifetime income. Deferred variable annuities were created in the 1950s in the United States as a tax-deferred vehicle for accumulating assets. They grew in popularity after the Tax Reform Act of 1986 limited the opportunities for tax-deferred savings in qualified retirement plans. Such a deferred variable annuity with low costs and de-emphasized guarantees provides tax deferral for those investors who have already filled other options and seek to invest further in tax- inefficient asset classes that may generate ordinary income and short-term capital gains. To benefit from tax deferral, it is vital that the annuity costs are less than the tax benefits.