When planning for retirement, an annuity can be a wise financial tool. One key benefit to having an annuity is the guaranteed lifetime income stream it can provide. For example, when someone chooses the lifetime income option, they will be able to count on a set amount of income for the remainder of their life - regardless of how long that may be.
Another reason that annuities can be beneficial when planning for the future is that the money inside of an annuity during its "accumulation" period is allowed to grow on a tax-deferred basis. This means there is no tax to be paid on the gain in the account until the time of withdrawal.
This, in turn, can allow the funds in the annuity to compound over time, as a return can be earned on the principal, as well as on the interest, and on the money that would have otherwise been taxed.
While many people own annuities inside of a regular brokerage or bank account, there are ways that you can have an annuity inside of an IRA (Individual Retirement Account). Yet, because IRAs are already tax-advantaged, there can be both benefits and drawbacks to putting an annuity inside of this type of investment account.
What are IRA Annuities and How Do They Work?
An IRA annuity is an annuity that is held within an Individual Retirement Account. Just as you can invest your IRA funds into stocks, bonds, mutual funds, and other financial vehicles, you can also use this money to purchase an annuity.
But before you do so, there are some factors to consider. For instance, if you own an IRA annuity, the balance in the annuity may not be transferred to another individual. (Although you are allowed to transfer an existing IRA annuity into another IRA account that is in your name).
In addition, if you own an annuity within a traditional IRA account (as versus in a Roth IRA), you will still need to abide by the required minimum distribution (RMD) rules. These state that distributions from the account must begin before April 1st of the year you reach age 70 1/2.
If, however, you instead own the annuity in a non-IRA account, or in a Roth IRA, there is no requirement to begin taking a minimum amount of withdrawals at any age. These types of accounts will also allow you to continue making contributions, whereas a traditional IRA requires that contributions cease at age 70 1/2. Likewise, if you own an annuity outside of an IRA, there are also no annual maximum contribution limits.
Taking the Next Step to Setting Up an IRA Annuity
If an IRA annuity is the right choice for you, it is important to keep in mind that all annuities are not the same. With that in mind, be sure that you first discuss all of your potential options with someone who is a specialist in this area before making a commitment.
Otherwise, you could find that you are locked into a product that doesn't necessarily meet all of your specific financial goals and needs. With the right annuity in your IRA, though, you can reap both short- and long-term benefits going forward.