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An annuity is a tax-advantaged insurance product that has become a popular investment vehicle for retirement. The Internal Revenue Service (IRS) has strict regulations on how an annuity contract can be rolled over into an IRA. The IRS stipulates that ““if an annuity contract was distributed to you by a qualified retirement plan, you can roll over an amount paid under the contract that is otherwise an eligible rollover distribution. For example, you can roll over a single sum payment you receive upon surrender of the contract to the extent it is taxable and isn’t a required minimum distribution”. That said, the question begs to be answered if you should invest in annuities through your IRA in the first place. In this article, financial experts discuss the advantages and drawbacks of investing in an annuity via an IRA.
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Perhaps. Annuities carry guarantees that can put a floor on your retirement income.
“This question has been one of debate for decades primarily because there are those that feel it’s improper. However, some pundits surmise the client is being sold a product with the enticement of added tax-advantaged outcomes because annuities themselves are tax-deferred. This is accurate in that an annuity held in a qualified account offers no additional tax benefits, but in my opinion it shouldn’t be the primary part of the discussion.
Annuities have other benefits in addition to tax deferral, including that of guaranteed income. At its core, in its very DNA, an annuity was created to provide guaranteed income in its distribution phase. Arguably, annuities do it better than most other vehicles and the often do it with a better burn rate (payout rate) than other options. Annuities can also provide a more efficient or favorable distribution than RMD requirements would have one take while still satisfying Uncle Sam’s rules. However, purchasers should be aware of terms, conditions, and costs associated with annuity contracts – not all monies are appropriate for annuities, and products and features are subject to availability and sometimes a higher price tag. However, an annuity can be a viable option for an IRA to help get it off the “roller-coaster” that some may not have the stomach for as they approach retirement. Many 401k programs today are implementing annuity platforms within their programs for these exact reasons.
Annuities also leverage mortality risk pooling which can allow for less dollars to produce more income for a longer period of time – without risk if in a guaranteed stream. As a byproduct, the client can establish a baseline guaranteed ‘sleep-well’ income that can potentially cover the essentials for as long as they and their spouse live. Further, this method allows the other dollars in their portfolio to flex their muscles more liberally because the essentials are no longer at risk. In other words, annuities can allow the client to invest more elsewhere in pursuit of higher growth with less emotional and psychological encumbrances during retirement. A proactive strategy rather than the riskiest reactive tendencies all too many people fall into.
The simplest solution comes from the simplest but prudent question: Would you prefer enjoying retirement with guaranteed income or would you like to ‘play it by ear’? Remember that all guarantees are based on the claims-paying ability of the issuer.
Protecting the client’s IRA within an annuity puts a floor on this functionality, although for this security, the client may be limiting their growth potential. Whether it be with a guaranteed income rider, or simply an immediate income annuity,, annuities can allow for the specific retirement income responsibility of the IRA to be fulfilled as intended.. After properly assessing and budgeting an annuity can be a nice safety net for retirement – not having any guarantees on one’s IRA can leave a lot to chance.”
Skeff Bisset, Director of Financial Professional Development, Wealth Continuum Group 3414211RB_Jan23
Three Reasons Why Investing In An Annuity May Be A Bad Idea For Many People
“No, I don’t believe that you should necessarily invest in annuities in your IRA. There are three reasons why I believe investing in an annuity is a bad idea for many people. First, an annuity offers deferred taxation and asset protection from a lawsuit, but your IRA has that already, so you don’t benefit from those features at all. Second, the investments in an annuity can have fees associated with them that are much higher than using mutual funds or ETFs, so it is much better to grow your money in investments directly. Third, annuities can be great for people entering retirement, but those ongoing fees and lack of features can make them detrimental for someone looking for asset accumulation and growth.
If you like annuities because they offer features like guaranteed rates or a maximum loss, you can still invest in them, but wait until you are getting closer to retirement. It is not uncommon for annuities to offer a period of time (such as 7 years) for you to get a guaranteed increase in the benefit base. If you are within that time frame of retirement, an annuity could be a part of your retirement plan; however, if you are younger than that keep away from them.”
Andrew Cremé, Financial Planner, Raymond James Financial Services, Inc.
The Only Exception Will Be If You’re Converting Your IRAs To An Instrument That Pays Out A Guaranteed Amount
“People should never invest in annuities via IRAs. These are both tax-deferred instruments and would defeat the purpose. The only exception will be if you’re converting your IRAs to an instrument that pays out a guaranteed amount. This is usually done when you’re about to retire and want a stable income during retirement.
For me, you should just convert a portion of your IRAs that will be enough to get a monthly stipend. Find out what your monthly needs are and get an annuity equivalent to that. This is because, in case you expire before the end of your annuity, then the money goes to the insurance company. You don’t want just to give away all of your hard-earned money, right? By converting only a portion, you will still have money left that you can leave to your loved ones.”
Michael Miller, CEO, VPN Online Multimedia Inc.
Whether Or Not To Invest In An Annuity Within A Traditional IRA Completely Depends On What Role You Want Your IRA To Play
“Whether or not to invest in an annuity within a Traditional IRA completely depends on what role you want your IRA to play for you. Typically, if you’re in the accumulation phase (read: still working and saving toward retirement), an annuity doesn’t make sense because there are often higher fees, and the growth potential within an annuity is usually pretty limited. A better alternative for the accumulation phase is mutual funds or ETFs that make up a diversified portfolio.
If you’re retired, or even approaching retirement, and want a safer investment vehicle that has limited downside risk and/or you wish to create a sourced of fixed income, an annuity might make sense for you. There are many different types of annuities though, so definitely do your research or ask your financial advisor.”
Tori Gutierrez, Investment Adviser Representative, Cetera Investors
Not A Good Idea To Invest In An Annuity Through The IRA, However, There Are A Few Exceptions
“It is probably not a good idea to invest in an annuity through the IRA. Since one of the primary benefits of an annuity is that your money grows tax-deferred, it does not make much sense to hold one in an account like an IRA, which is already tax-deferred. However, there are a few exceptions. For instance, if you’re retired or about to retire soon and feel that you need a guaranteed income then social security will provide. In that case, it makes sense to use a part of your IRA money to buy an immediate annuity that will pay income for life.”
Ahmed Ali, Content Marketing Executive, Physicians Thrive
“Purchase” An Annuity In An IRA At Retirement
“I’ll say two things to clarify things. I would not “invest” into an annuity in an IRA. “Investing” generally means long term, in the hopes for gains. If someone “invests” into an annuity, they are likely going to invest in a variable annuity that is tied to the stock market. These annuities are complicated, costly, and very difficult to change. It’s like buying a super duty pickup to haul your groceries home. It’s a waste of money and generally not suitable for the need.
I would, however “purchase” an annuity in an IRA at retirement. I generally recommend my clients wait until 70 (at least the higher-earning spouse) to take Social Security. If they retire at 65 for example, I recommend they “purchase” an immediate income annuity – Commonly called a single premium immediate annuity (SPIA). This annuity basically takes cash or bonds from their portfolio and buys them a 5-year income stream so they can wait until taking social security. These are extremely low cost, they pay the advisor a much smaller commission, and these are essentially personal pensions for the client.
So to sum it up, I wouldn’t “invest” into an annuity for long term gain, I would “purchase” an annuity for temporary (or sometimes lifetime) income.”
Dan Murphy, Founder, Greater Good Financial
Unlike other retirement vehicles, annuities have no contribution limits. These insurance products have become a popular investment choice because of their potential to accumulate more capital than other retirement investment options. For those investors who are interested, have look at our top annuity companies reviews to gain a better understanding of the space and available options.
Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.
