Holding an Annuity in an IRA

Holding an annuity in an IRA can give you greater flexibility in taking required minimum distributions if you plan to continue working beyond age 72. It is important to choose the right type of annuity based on your current age, life expectancy and anticipated retirement age.

Terry Turner, Financial writer for Annuity.org
  • Written By
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner is a senior financial writer for Annuity.org. He holds a financial wellness facilitator certificate from the Foundation for Financial Wellness and the National Wellness Institute, and he is an active member of the Association for Financial Counseling & Planning Education (AFCPE®).

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  • Edited By
    Savannah Pittle
    Headshot of Savannah Pittle, senior editor for Annuity.org

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Financially Reviewed By
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for Annuity.org

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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  • Updated: March 22, 2024
  • 5 min read time
  • This page features 10 Cited Research Articles

Key Takeaways

  • Both annuities and IRAs allow you to grow money tax-deferred until withdrawal.
  • Annuitizing an IRA provides the added benefit of no longer having to take a required minimum distribution, or RMD, from the annuity.
  • RMDs are the minimum amount you are required by law to withdraw from your IRA once you turn 73.
  • Choosing to hold an annuity in an IRA is a personal choice based on your unique financial goals.
  • The longevity annuity may be the best annuity to hold in an IRA because it can be customized to your goals.

Does It Make Sense To Hold an Annuity Inside an IRA?

While annuities differ from IRAs, both financial tools allow your money to grow tax-deferred — meaning you won’t pay taxes until you withdraw the money. So, if you’re already getting the tax deferment advantage with the IRA, what is the need for an annuity in the IRA?

To start, the qualifying longevity annuity contract, or QLAC, shifted many opinions on this subject when it was introduced in the 2014 federal tax rules. Since its initial introduction, the rules have been amended through the Secure Act 2.0 in 2022.

This newest rule change eliminates any percentage contribution limits and now allows a single lifetime limit of $200,000 per individual into a deferred annuity, also known as a longevity annuity.

In other words, you can put a lump sum into an annuity and receive guaranteed income sometime in the future.

The benefit of holding an annuity inside an IRA is that you no longer have to take required minimum distributions, also known as RMDs, on the money you put into the annuity.

Because of QLACs, holding an annuity within an IRA has become more of a personal decision based on unique financial situations and goals.

“It depends on the needs of the individual investor, coming back to the age of the investor,” Joe Liekweg, an independent agent at Insuractive told Annuity.org.

Holding certain kinds of annuities in an IRA can offer significant benefits as an investment option for investors who are looking for options to defer or delay some of their mandatory distributions or simply guarantee a specific return in retirement.  Income annuities can be a very powerful part of building a sustainable income plan in retirement.  I encourage all retiree clients to cover at least their essential expenses with guaranteed income and annuities can provide the customization to make that feasible.  It is important to know that IRAs and other retirement accounts are already tax deferred and an annuity will not add any benefits in that regard. 

Required Minimum Distributions

Required minimum distributions are the lowest amounts the law requires you to withdraw from your IRA once you reach 73 years of age.

Other qualified retirement accounts such as active 401(k) plans allow you to delay taking RMDs until you retire if you keep working past 73. IRAs and prior (inactive) employer 401(k) plans still require you to make a required minimum distribution at 73, whether you retire or not.

If you fail to take out the minimum required amount from your account on time every year, you can face stiff financial penalties. Any money remaining in your account after you die must also be distributed. Under the SECURE Acts,  certain types of beneficiaries of inherited IRAs must take full distribution of the IRA within 10 years of the original owner’s death if the death occurred after 2019.

Because most IRAs defer taxes until you start withdrawing the money from the accounts, the IRS requires you to take out a portion of the funds so they can be taxed. In February 2022, the IRS issued new regulations requiring beneficiaries to to take annual RMD withdrawals for the first nine years and completely deplete their account by December 31 of year 10, provided the beneficiary inherited the account from an owner who had not yet reached the required beginning date.

If the deceased owner had already begun RMDs, then the beneficiary has the option to stretch the IRA over their own life expectancy. Rules differ for spouse and non-spouse beneficiaries.

To calculate your RMD, divide your IRA balance by your life expectancy factor as determined by the IRS. You can use the IRS life expectancy tables and worksheets to help with the calculation.

Retirement Plans with an Age 72 Deadline to Start RMDs

  • Traditional IRAs
  • SEP IRAs

Source: IRS

Step 1
Step 2
Step 3
Step 4

How soon are you retiring?

Step 1
Step 2
Step 3
Step 4

What is your goal for purchasing an annuity?

Select all that apply

Do RMDs Apply to Roth IRAS?

The RMD rules do not apply to Roth IRA owners while they are alive. The money you place into a Roth IRA is already taxed. Since the money you take out is tax-free at that point, the IRS doesn’t require an RMD on Roth IRAs.

Any money you take out of your Roth IRA is tax-free, including money from an annuity inside your Roth IRA. Placing an annuity inside of a Roth IRA can lessen your risk while saving for retirement and generate tax-free lifetime income during retirement.

When deciding whether to place an annuity inside an IRA, consider the goals you are trying to achieve. If you are using your Roth IRA solely for growth strategies, an annuity may not be the best option for aggressive growth. However, if you are looking for safety and peace of mind knowing you will have income for the rest of your life, then an annuity may be right for you.

What Annuity Is Best to Hold Inside an IRA?

A longevity annuity is the best type of annuity to hold inside an IRA. A benefit of annuities is that they can be customized to fit your financial needs and goals. Within the category of longevity annuities, you can choose between a fixed annuity and a variable annuity.

Fixed annuities guarantee you a fixed amount of interest on your contributions.

Variable annuities, on the other hand, allow you to choose options in which to invest; the value of a variable annuity fluctuates with the market.

These annuities largely duplicate what you are already doing with your IRA or 401(k) and are meant to be long-term investments.

“A lot of times, if you’re looking to buy an annuity inside of your IRA, that would be your safety portion — like your bond portion — if it’s allowable,” Liekweg said.

It is typically more advantageous to make the maximum allowable contributions to your IRA and 401(k) plans before investing in a variable annuity, according to the Securities and Exchange Commission.

Lock In Fixed Annuity Rates as High as 6.9%

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FAQs About Annuities Inside an IRA

What are the advantages of an annuity in an IRA?

The chief advantage of an annuity in an IRA is the ability to select guaranteed interest or income options that can provide certainty in retirement. It also gives you more flexibility around required minimum distributions if you plan to keep working past age 73.

What are the disadvantages of an annuity in an IRA?

Since both annuities and IRAs are tax-deferred, it may not make sense to combine the two. Annuities and IRAs each offer different advantages to consider based on your financial goals.

What are examples of when someone should hold an annuity in an IRA?

If you plan to keep working past age 73, holding an annuity in an IRA is a retirement planning strategy that can prevent having to take required minimum distributions from your IRA.

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Last Modified: March 22, 2024
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