While municipal bonds have received most of the publicity, marketers of other types of tax-favored investments also are seeking to capitalize on President Clinton's economic plan.
Case in point: Sponsors of variable annuities, which combine some of the features of insurance products, mutual funds, and tax-deferred retirement savings programs.According to some published estimates, sales of variable annuities increased more than 50 percent last year.
Many analysts figure the business will get a further boost from Clinton's proposed increases in tax rates for upper-income Americans, since annuities allow for tax deferral on all investment earnings until the money is withdrawn from the account.
"Variable annuities will become a mainstream financial product in the 1990s, just like mutual funds exploded in the '80s," contends Michael Kiley, vice president of asset management at Guardian Life Insurance Co.
Perhaps so, financial advisers say, but the two categories of investment products should not be confused. Variable annuities' greatest appeal tends to occur in more specialized circumstances than the broad uses to which modern mutual funds can be applied.
Annuities are contracts, written by insurance companies, that provide for a stream of income to the investor, typically in retirement.
With an immediate annuity, the investor puts up a lump sum and starts receiving periodic payments right away. In a deferred annuity, by contrast, the investor's capital is invested for a time, allowing it to accumulate additional money before payments begin.
Within the category of deferred annuities, many contracts have traditionally been "fixed" according to a set schedule of interest payments. These days, buyers are more and more likely to opt instead for a variable annuity in which the capital is invested in, say, mutual funds that own stocks, bonds or both.
In fact, it's common these days to encounter variable annuity offerings that amount to a family of mutual funds wrapped inside the structure of an annuity.
Because of that packaging, no current taxes must be paid on dividends or capital gains distributions earned. Just as in an individual retirement account, Keogh plan or 401 retirement plan, these earnings can compound tax-free until withdrawals begin from the account.
What's more, annuities aren't subject to the annual contribution limits that govern IRAs, Keoghs and 401 .
But they do have their significant drawbacks and limitations. For one thing, annuities generally come with redemption charges in their early years, on top of a tax penalty for withdrawals before you reach age 591/2, that make them poor choices for assets you want to keep within easy reach.