Annuity vs. IRA

Annuities and individual retirement accounts (IRAs) are both retirement savings vehicles that allow for tax-deferred growth. While annuities are insurance products that provide guaranteed income, IRAs hold various types of investment assets. One of the primary differences between annuities and IRAs is that annuities enjoy tax-deferral without most of the restrictions that are placed on IRAs.

Robert J. Smith CLU, ChFC, AAMS, Financial Advisor
  • Written By
    Robert J. Smith, ChFC®

    Robert J. Smith, ChFC®

    Expert Contributor

    Robert J. Smith is a financial advisor who has earned the CLU®, ChFC®, LIC, CCCC, RIA, AAMS®, CMP® and CMPS® professional designations. Throughout his five-decade career in financial services, Robert has consistently ranked in the top 1% worldwide in insurance and financial services production.

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  • Edited By
    Kim Borwick
    Kim Borwick, Financial Editor for Annuity.org

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

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  • Financially Reviewed By
    Rubina K. Hossain, CFP®
    Rubina K. Hossain

    Rubina K. Hossain, CFP®

    Certified Financial Planner™ Professional

    Certified Financial Planner Rubina K. Hossain is chair of the CFP Board's Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.

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  • Updated: September 15, 2022
  • This page features 4 Cited Research Articles
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How to Cite Annuity.org's Article

APA Smith, R. J. (2022, September 15). Annuity vs. IRA. Annuity.org. Retrieved September 26, 2022, from https://www.annuity.org/annuities/strategies/annuity-vs-ira/

MLA Smith, Robert J. "Annuity vs. IRA." Annuity.org, 15 Sep 2022, https://www.annuity.org/annuities/strategies/annuity-vs-ira/.

Chicago Smith, Robert J. "Annuity vs. IRA." Annuity.org. Last modified September 15, 2022. https://www.annuity.org/annuities/strategies/annuity-vs-ira/.

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With the wealth of financial products on the market, people who want to save for retirement may struggle with finding the right savings vehicle for their particular needs. This is even more pertinent for the roughly half of Americans who don’t have access to work-based retirement plans.

For these people, the key is determining how much you need to save each year, when you plan to retire, your need for flexibility and liquidity and your overarching retirement plan.

How Do Annuities Differ from IRAs?

An annuity is a contract between an insurance company and an individual. Annuities can be purchased with after-tax dollars, in which case, the annuity is classified as non-qualified and will grow tax-deferred with only the gains becoming taxable when withdrawn at retirement.

An IRA is a retirement investment account that also allows an investor’s money to grow tax-deferred. IRAs are subject to annual contribution limits, which are not imposed on non-qualified annuities.

Like annuities that are purchased with pre-tax dollars, amounts withdrawn from an IRA account are taxable because the investor has not paid taxes on their contributions prior to collecting income from the IRA for retirement.

Annuities also offer riders, which are optional contract enhancements, such as long-term care (LTC) riders and cost of living adjustments (COLA).

Passive Income Streams

Annuities Held Within IRAs

IRAs are not investment products in and of themselves. IRAs are retirement plans that hold annuities or investment vehicles, such as stocks, bonds and mutual funds.

Annuities may be placed inside of IRAs. However, this may be a duplication of effort because annuities, by definition, are retirement products that enjoy the same tax-deferred growth as IRAs. In addition, the annual contribution limits placed on IRAs deter people from employing this strategy.

Many people purchase annuities to hold within IRAs, just the same as they would use the money in an IRA to invest in bonds or mutual funds. This strategy has proved efficient for people who want to contribute more to their retirement savings.

For those who wish to contribute larger amounts, they simply purchase additional annuity contracts with after-tax income to enjoy the same tax-deferred growth on their additional retirement savings.

Alternatively, you can rollover a portion of your IRA money into an annuity to ensure a lifetime income stream.

How to Diversify Your Portfolio

Annual Contribution and Deduction Limits

According to the Internal Revenue Service, the annual contribution limit for 2022 is the same as it was in 2021, 2020 and 2019:
  • $6,000 ($7,000 if you're age 50 or older), or
  • Your taxable compensation for the year, if your compensation was less than this dollar limit.

Source: IRS

Additionally, whether or not your traditional IRA contributions are deductible depends on whether you and your spouse have retirement plans available at work. The IRS dictates that IRA deductions may be limited if you are covered by a retirement plan at work. Additionally, if you’re married, your deduction will be limited if your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels.

Both qualified and non-qualified annuities may be converted into income that a person cannot outlive. No other financial vehicle is able to provide retirees with the same peace of mind.

An annuitant may also choose to take higher income benefits for a shorter period of time and name a beneficiary to receive the remainder of that income in the event that he or she dies before end of the contract term.

Annuity income payment schedules typically range anywhere from five years to twenty years, depending on the contract terms.

Multiple annuities may also be purchased for the laddering of payments to cover life insurance premiums and other necessary costs. The laddering of immediate annuities at retirement in order to protect against fluctuating interest rates is also an option to discuss with a financial advisor.

Know Your Options When it Comes to Annuities and IRAs

A specific type of annuity created to help retirees who own IRAs deal with RMDs is a qualified longevity annuity contract (QLAC). Rolling an IRA into a QLAC allows you to defer RMDs from age 72 to age 85.

Whether you place your annuities in IRA accounts or not is up to you. The benefit of such a financial depends on your retirement timeline, whether or not you have other retirement accounts and other factors.

The same is true when deciding whether or not to roll an IRA into a QLAC. A consultation with a financial advisor who is well-versed on retirement accounts will be of great benefit to you when faced with such decisions.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 15, 2022

4 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. IRS. (2019, December 20). IRA Deduction Limits. Retrieved from https://www.irs.gov/retirement-plans/ira-deduction-limits
  2. IRS. (2022, August 25). Retirement Topics - IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  3. IRS. (2019, December 4). IRA FAQs – Contributions. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions
  4. Stanford Center on Longevity. (2018, October). Special Report: Seeing Our Way to Financial Security in the Age of Increased Longevity. Retrieved from http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/