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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


($5.1 billion),

Pacific Life


($3.8 billion) and



($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.


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.

Variable annuities also charge fees for optional benefits like a guaranteed minimum income, an increased death benefit or long-term-care insurance.




Variable annuities and IRAs offer tax-deferred growth, and withdrawals from variable annuities and traditional IRAs are taxed as ordinary income. (In both cases, early withdrawals -- those made before you reach age 59½ -- carry a 10% tax penalty.)

But while traditional IRA contributions are usually tax-deductible, Roth IRA contributions and contributions to your variable annuity are not. The trade-off? The former requires you to start taking out money by the time you reach 70 1/2, whereas Roths and annuities do not have any required minimum distributions.


Too close to call

Contribution limits

IRAs have a $5,000 limit in 2008 -- plus another $1,000 if you're 50 or older -- while variable annuities have no contribution limits. Both types of accounts allow for tax-free rollovers, although rolling over your annuity can result in restarting the clock for the surrender period.


Variable annuity

Investment options

Both variable annuities and IRAs allow a measure of control over the underlying investments in your account. With a variable annuity, your investment options are typically limited to a handful of stock or bond funds called subaccounts. What's more, many companies charge fees for changing your asset allocation.

IRAs, meanwhile, allow you to invest your savings in virtually any kind of investment, from stocks to bonds to certificates of deposit. You're generally only limited by the selection offered by your particular broker.



The final analysis

The IRA is the winner -- with the qualification that every financial decision depends on your particular circumstances. The IRA's supremacy may be hard to believe at the moment, as your IRA likely has taken a beating in the past several weeks. But a few factors weigh heavily in these accounts' favor.

First, let's acknowledge that the guaranteed lifetime payments from an annuity can eliminate concerns about outliving your retirement funds. The high fees and limited investment options, however, can severely limit your savings' growth potential. For this reason, many advisers recommend investing in a variable annuity only after you have fully funded your 401(k) and IRA accounts.

What's more, the solidity of your variable annuity depends entirely on the financial strength of the insurance carrier. The recent spate of failed financial institutions, not to mention insurance giant



, makes that an even bigger concern these days.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.