Difference Between Annuity and Mutual Fund

A retirement plan is an excellent way of ensuring a peaceful and comfortable life after long years of service. When looking at retirement plans, one has various options like annuities, IRAs and mutual funds. It is always better to weigh the different options before choosing a retirement plan like annuities and mutual funds as these are different products with different features.

What is a mutual fund? It is a fund that is  in essence money pooled from many investors and invested in stocks, equities and bonds. The fund managers manage the mutual funds and diversify their investment mix based on performance.

What is an annuity? Issued by Life Insurance institutions, an annuity is built up of numerous mutual funds that work together. The investor usually gets a guaranteed premium along with the earned interest for his assets.

There is a big difference in the taxation between an annuity and mutual funds. Annuity gains are free from taxes until the assets are withdrawn. On the other hand, the gains in mutual funds are annually taxed.

One can also see a difference in the growth between annuity and mutual funds. With an  annuity, one is guaranteed a percentage growth each year. There is no guarantee on the growth each year for mutual funds however.

When withdrawing the assets or investments, both the retirement plans have different features. A person can withdraw money or assets from the mutual fund at any time. There is no penalty involved in withdrawing money from mutual funds. On the other hand, there is a fixed time for withdrawing funds from the Annuity. The money cannot be withdrawn before 59 and half years. In case the money has to be withdrawn before this period, the investor has to pay a certain penalty. The penalty is calculated according to the percentage of the interest that is earned.

Summary

1. A mutual fund is a fund which consists of pooled money from many investors which is then invested in stocks, equities and bonds.
2. Issued by Life Insurance institutions, an annuity is built up of numerous mutual funds that work together.
3. Annuity gains are free from taxes until the assets are withdrawn. On the other hand, the gains in mutual funds are annually taxed.
4. With an annuity, one can see a guaranteed percentage growth each year, there is no guarantee on the growth each year for mutual funds however.
5. A person can withdraw money or assets from the mutual fund at any time. There is no penalty involved in withdrawing money from mutual funds.
6. The money cannot be withdrawn before 59 and half years once invested in an annuity. In case the money has to be withdrawn before this period, the investor has to pay a certain penalty.