Which of the following is an advantage of variable annuities?

• A. Taxable today
• B. Tax-free distributions
• C. Tax-deferred participation in the equity markets
• D. No long-term growth

Answer: (C)

Tax-deferred growth inside the contract lets you participate in the equity markets through subaccounts while deferring taxes on the earnings until withdrawal. That deferral allows the investments to compound more efficiently, which is the key advantage of variable annuities. Distributions aren’t generally tax-free; they’re taxed as ordinary income to the extent of earnings, and there’s market risk involved, so there isn’t a guarantee of no long-term growth.