Annuity Vs. IRA: Which is Better for Retirement?

Shawn Plummer

CEO, The Annuity Expert

The annuity vs. IRA, which is better to save for retirement? An IRA is a qualified retirement savings plan available to individuals, designed to help save and grow money (tax-deferred) to finance a future retirement. An annuity is an insurance-based retirement savings plan designed to help individuals save and grow money (tax-deferred) to finance their future retirement. In this guide, I’ll go over the difference between annuity vs. IRA and explain how both can be the same.

What’s the difference between an annuity and IRA?

Often debated among “financial experts” is whether an annuity should ever be used in a tax-qualified IRA. Both annuities and IRAs provide income tax deferral. Therefore, it may at first seem redundant to place an annuity inside a qualified retirement plan.

That might be true if the only benefit an annuity offered is tax deferral. But, the fact is, annuities offer many advantages, whether held inside or outside of an IRA.

Annuities are flexible investment products that can help you achieve your long-term financial goals and provide a source of retirement income. Tax deferral alone is not a sufficient reason to use an annuity in an IRA. But income options, death benefit protection, investment selections and services, and flexibility are benefits an annuity can bring to an IRA.

IRA

An IRA (Individual Retirement Account) is a personal retirement account designed to accumulate retirement savings, tax-deferred, to finance the person’s future income during retirement. Contributions to an IRA are funded with pre-taxed dollars and are limited annually by the IRS.

Future withdrawals will be taxed as ordinary income and start as early as age 59.5 and no later than age 72 without a penalty.

Roth IRA

A Roth IRA is a personal retirement account designed to accumulate an individual’s retirement savings, tax-free, with the intent to finance the person’s future income during retirement.

Contributions to a Roth IRA are funded with dollars that have already been taxed and are limited annually by the IRS.

Future withdrawals will be tax-free if the Roth IRA is:

  • Maintained for at least 5 years,
  • Attainment of age 59.5,
  • Death has occurred,
  • An individual has become disabled
  • Purchase of a first home (Up to $10,000)

In addition, Roth IRAs have no age requirement for withdrawals like a traditional IRA.

Annuities

Deferred annuities are insurance for retirement, similar to how life insurance is death insurance. An individual retirement annuity is a personal retirement account designed to accumulate an individual’s retirement savings, either tax-deferred or tax-free, to finance their future income during retirement.

Future withdrawals will be taxed as ordinary income and start as early as age 59.5 without a penalty.

Potential annuity buyers can choose from:

Annuity Vs. IRA: What’s The Difference?

IRAs by themselves are investment products funded by mutual funds, stocks, and bonds. Annuities can either be investment-based or insurance-based retirement savings plans.

IRAs can offer more upside growth potential than most annuities but typically can not offer protection from a stock market loss like most annuities can.

All annuities’ benefits that IRAs do not have is converting the retirement savings into a guaranteed income stream that can’t be outlived.

IRAs and Roth IRAs contributions are limited by the IRS each year. For example, in 2020, an individual younger than age 50 can contribute up to $6,000 a year, and a person age 50 or older, can contribute up to $7,000 a year. With a nonqualified deferred annuity, there are no limitations on how much can be contributed each year.

With IRAs, withdrawals must be taken by age 72 to fulfill required minimum distributions by the IRS. With a nonqualified deferred annuity, there are no age limitations to withdrawal from the account.

Withdrawals from annuities and most IRAs are taxed as ordinary income and are subject to early withdrawal penalties if taken before age 59.5. The exception is the Roth IRA or Roth IRA Annuity.

Below is a table that compares some differences when comparing annuity vs. IRA.

Annuity vs. IRA: A Comparison

AnnuityIRARoth IRA
No Contribution LimitsLimited ContributionsLimited Contributions
Insurance or Investment ProductsInvestment ProductsInvestment Products
Guarantee on InvestmentNo Guarantee on InvestmentNo Guarantee on Investment
Tax-Deferred or Tax-Free GrowthTax-Deferred GrowthTax-Free Growth
Pass Down to BeneficiariesPass Down to BeneficiariesPass Down to Beneficiaries
Spousal ContinuanceSpousal ContinuanceSpousal Continuance
Market Volatility ProtectionCould Lose MoneyCould Lose Money
Guaranteed Lifetime IncomeCould Run Out of MoneyCould Run Out of Money

The Biggest Con With IRAs

The biggest problem with IRAs is the unknown of where an investor will end up financially at retirement. IRA owners can lose money from market volatility or save too little, too late. This is a major flaw.

An investor can now solve this problem with annuities and create a path to their desired future retirement income today. Because income riders are typically guaranteed, one could plan today and save to a guaranteed stream of income for life up to 30 years in the future. All of the guesswork is taken out of the equation.

The IRA Annuity

If it’s difficult to decide to invest between annuity vs. IRA, why not combine the two? It’s quite simple, really. An annuity buyer can either set up an annuity as an IRA or transfer funds from a previous IRA to an IRA annuity.

IRA Rollover To Annuity

To set up an IRA annuity is very easy. When applying for the annuity, select the IRA type (Traditional, Roth, or SEP IRA) under the Tax Qualification section of an annuity application. This will inform the insurance company of the type of contract you’d like to set up.

Ira Annuity

Transfer IRA to annuity

If an IRA is transferred to an annuity, the applicant will select the Tax Qualification on the annuity application (see above) then select where the source of funds are transferred from on the Transfer Form.

Transfer Annuity To Ira

IRA One-Rollover-Per-Year Rule

The IRS allows an individual to transfer from one IRA to an IRA annuity, one time in any 12-month period, regardless of the number of IRAs you own. This direct transfer will not trigger a taxable event even if the applicant is before age 59.5.

Conclusion

The primary similarity between IRAs and annuities is both offer tax-advantaged benefits to grow your retirement savings. Thus, they serve a common purpose.

An IRA is an investment-based retirement savings plan that limits a person’s contribution to any given year. The annuity can be either an insurance-based or investment-based retirement savings plan without limits to contribute in any given year.

The IRA annuity offers the best of both worlds by allowing an annuity to grow the IRA.

Which retirement savings plan is best for you?

IRA Examples

Questions About An Annuity vs. IRA

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At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Frequently Asked Questions

Can you lose money in an IRA?

Investors can lose money in both an IRA, Roth IRA, and a variable annuity IRA. However, owners of an insurance-based IRA annuity or insurance-based Roth IRA can not lose money.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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