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Deathmatch: IRAs vs Annuities

If you pit two retirement-investment options against each other, which one earns the knockout?

Variable annuities boasted net assets of close to $1.5 trillion in 2007, according to the Insurance Information Institute. That figure pales in comparison to the staggering $4.75 trillion invested in IRAs last year, according to the Employee Benefit Research Institute .

There is a little wiggle room in the figures, however: Most of the growth in IRA assets comes from rollovers of other retirement accounts, such as 401(k) plans. Meanwhile, actual sales of variable annuities totaled $160.4 billion in 2007. The top sellers include major players like Hartford Life (HIG) ($5.1 billion), Pacific Life (ISIN) ($3.8 billion) and AXA (AXA) ($2.6 billion).

To ensure a fair fight, it's important to define the terms: A variable annuity is a contract with an insurance company that guarantees you either an immediate payout or a series of periodic payments from a specific date of your choosing until your death. IRAs, on the other hand, are tax-advantaged investment vehicles from which you can withdraw money to support yourself in retirement.

Which one comes out ahead? Read on for a blow-by-blow account.

Fees

Most IRAs charge fees equivalent to about 0.7% of your account. Some, like Vanguard's Target Retirement 2040 Fund, are much cheaper, with an expense ratio of just 0.21%.

Variable annuities, on the other hand, generally come with a laundry list of standard fees that can total more than 2% a year. They include annual administrative fees, surrender charges, an annual mortality and expense risk charge, and underlying fees and expenses from the mutual funds in which your annuity is invested.

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