Tax deferred annuity?

Our house hold income is more than 200k. After maxing out on 403b and IRA, what other investment vehicle provides tax free growth? I have heard mixed reviews of annuitys. Some say their operational costs outweigh any benifits, while others say its a good investment vehicle if you have already maxed out on IRA and employer sponsored plans.

I would forget annuities and consider tax-managed mutual funds such as Vanguard's VMCAX. Chances are you'll end up with a larger pot of dough in the long run--and you'll get to keep more OF IT after taxes (when you finally sell). Another option are ETFs, which are very tax efficient.

Everything is relative. A lot depends upon your age and what you want the money to do. If you are already maxing out a 403b and an IRA for both spouses you already have a lot of tax deferred investments. Something to keep in mind is that when you start taking money out of those it is taxed as ordinary income, so it may not be a bad thing to have some of your money in other vehicles. Capital gains taxes are typically less than income tax (currently maxing at 15%). I think its important to have different "buckets" that you can tap into at retirement with different tax treatments. That way you can manage your tax bill more effectively. You also need to consider Required Minimum Distributions on tax deferred vehicles that start at 70 1/2 which means you would have to take a certain amount of money out of those accounts and pay the taxes on it whether you need it or not. If you really are stuck on tax deferred growth and have excess to put in you can always consider a Variable Universal Life policy. Some don't like permanent insurance, but in the right situations that can make a lot of sense (many also have long term care riders attached which can be a huge benefit if the need arises). With the life ins. you can take tax free loans from the policy later to draw upon the capital you've invested....I know this may be more than you were looking for...I suggest finding a good Financial Advisor in your area and getting a customized plan for your situation.

Here are some other ideas for tax-free growth. From your comments about IRA I presume you live in the US. Oddly enough, investing in a taxable acount (rather than tax-deferred0 may be better for you - but let's look at several alternatives.

1. 529 education savings plans for your children (or grandchildren or even yourselves). Example, with your children: You can put $12k/yr (plus you spouse can put in another $12k/yr). That money can be ivnested in the plan's mutual funds and can all be withdrawn w/o any taxes on principal or gains IF it's used for higher education expenses of the beneficiary (the child or grandchild, nephew, etc). So you are not taxed on the growth. The $12k/yr limit is due to US gift taxes - it's the max you can gift to a non-spouse w/o becoming gift-taxable. There is a special exception for 529 plans that allows you to accelerate your gifting for 5 yrs - so in theory a couple could gift as much as $120k to a child's 529 plan in a single year...that should cover his/her college costs.
\oplus you can change the beneficiary at any time - so it CHild A does not use all the money you can change the bene to child B.

If you have 5 children you can do this for each child...so it's a simple way to hide growth from taxes.

If you don't use the $ for education you pay regular income taxes on the gain and a 10% penalty. Ouch, but you have delayed taxes for many years.

2. Tax-deferred annuities can be useful, and there are some bare-bones variable annuities with internal fees as low as 2.5%....if you add all the bells & whistles of some plans' growth guarantees, future withdrawal benefits, the annual cost rises to 3.5 or 4%. But the guarantees may be worth it to you. I would not rule them out entirely. And remember that mutual funds' internal fees can run from 0.5 (index funds) to 1.25% (typical) to 2.5% (there are some of these).

3. Another great idea is to invest in a taxable account with ETFs. Most pay little or no dividend and ETFs do not pay out cap gain distributions annually like many traditional MFs do. So there is almost no tax impact until you sell, and when you do sell its a LT cap gain (15% max rate as of today)....if you did the same in an IRA your withdrawals would ALL be taxed as ordinary income (probably 25 - 30% rate) - principal and gains alike.

SO IF YOU BY AND HOLD INVESTING IN A TAXABLE ACCOUNT IS MORE EFFICIENT THAN INVESTING IN AN IRA. That's contrary to conventioonal wisdom, but true.

In other words, investing in a taxable account does NOT have to result in annual capital gains or interest/dividends to declare - it depends non how you invest.

There is one other great benefit of a taxable account. In many states that allow JTWROS between spouses, when one account dies ALL the assets in the account have their cost basis stepped-up to the value as of date of death of the spouse. That means ALL embedded cap gains are gone - and the spouse can sell assets w/o any capital gains. This does NOT happen in an IRA or annuity.

Step-up in basis is a great way to avoid paying capital gains - only problem is that somebody has to die for it to work.

Good luck - as in many things the 'obvious' answer may not be the best for you.

Melody S's answer is right on.

If you are not familiar with it, check into Variable Universal Life Insurance. I would recommend that you go and see a Financial Advisor that provides solutions, not one that just "sells" products. Most Financial Advisors are insurance licensed and understand all types of insurance and insurance products, but in my experience, not all Insurance Agents understand or can offer other type of financial products and services.

Here is some info on Variable Universal Life.
http://en.wikipedia.org/wiki/Variable_un...

Good Luck!