by | Oct 23, 2020 | Annuities

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.

Protecting The Client’s IRA Within An Annuity Puts A Floor On This Functionality

“This question has been one of debate for decades primarily because there are those that feel it’s improper. However, this is based on the premise that they are being sold a product with the enticement of added tax-advantaged outcomes because annuities themselves are tax-deferred. Tax deferral is quite frankly a non-issue in this circumstance as it pertains to leveraging the annuity vehicle.

Unfortunately, this has overshadowed the primary existence of an annuity – That of guaranteed income. At its core, in its very DNA, an annuity was created to provide guaranteed income. It does it better than any other vehicle and the vast majority of the time it does it with a better burn rate (payout rate) than other options. It can also be a more efficient or favorable distribution than RMD requirements would have one take while still satisfying uncle sam’s rules.

Leveraging mortality risk pooling allows for less dollars to produce more income for a longer period of time without risk in a guaranteed stream. As a consequence of this, the client can establish a baseline guaranteed sleepwell income that covers 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 allow the client to invest more elsewhere PROPERLY 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 question: Would you prefer enjoying retirement with your day-to-day essentials covered for the rest of your days or would you like to ‘play it by ear’?

Protecting the client’s IRA within an annuity puts a floor on this functionality. Whether it be with a guaranteed rider, or simply an income immediate annuity they allow for the specific unique sole responsibility of the IRA to be fulfilled as intended for its insured. Housing an annuity elsewhere simply cannot offer the insured the same solace.”

Skeff Bisset, Director of Financial Professional Development, Wealth Continuum Group

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

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.