Final answer:
The main advantage of buying a variable annuity over a similar mutual fund is the tax deferral on investment growth, where no income taxes are due until money is withdrawn, potentially at a lower tax rate in retirement. Therefore the correct answer is A. You don't have to pay income taxes until money is taken out of an annuity.
Step-by-step explanation:
The advantage of buying a variable annuity rather than a similar mutual fund is that you don't have to pay income taxes until money is taken out of an annuity. This is different from mutual funds, where earnings are typically subject to taxes in the year the earnings are realized. Variable annuities offer the benefit of tax deferral on the growth of the investment. They are particularly useful for long-term retirement savings as they allow the investment to grow without the drag of annual taxes, and taxes are only paid when withdrawals are made, which is often at a lower tax rate in retirement.
It is important to note that while variable annuity earnings are not taxed until withdrawal, this can also mean that withdrawals are taxed as ordinary income, rather than potentially lower long-term capital gains rates that might apply to mutual funds held for more than a year. In addition, variable annuities typically have higher fees than mutual funds, and there are often fewer variable annuities than mutual funds to choose from.