Does It Make Sense To Hold an Annuity Inside an IRA?
Whether it makes sense to purchase an annuity in an IRA depends on your financial circumstances and priorities.
“It depends on the needs of the individual investor, particularly their age,” Joe Liekweg, an independent agent at Insuractive, told Annuity.org.
Key Facts About Holding an Annuity in an IRA
- 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 from the annuity.
- RMDs are the minimum amount you are required by law to withdraw from your IRA once you turn 73.
- A fixed deferred annuity is the best type of annuity to hold in an IRA because it can diversify your portfolio with reliable growth, principal protection and guaranteed income in retirement.
Some of the primary reasons people purchase annuities in general are to create guaranteed income in retirement, to grow their savings while keeping their principal protected and to take advantage of tax deferral.
If you want to ensure that your retirement savings last for the rest of your life, purchasing an annuity within an IRA can accomplish this. You can customize annuities to pay regular income for your lifetime or even for your and your spouse’s lives.
If you’re a more conservative investor who allocates some money towards secure fixed-rate accounts like a CD, you could benefit from allocating that portion of your portfolio towards a multi-year guaranteed annuity (MYGA) instead.
MYGAs are one type of annuity that earns interest at a guaranteed rate, much like a CD. However, MYGA rates almost always outpace CD rates for the same term. MYGAs also tend to have longer term options than CDs usually do, so you could lock in a high rate for longer.
Both annuities and traditional IRAs allow your money to grow tax-deferred — meaning you won’t pay taxes until you withdraw the money. If your primary concern is growing your retirement savings tax-deferred, owning an annuity in an IRA doesn’t make as much sense.
Picture Betty as a 60-year-old retired executive who has accumulated $500K in her IRA. Like most people, she fears outliving her savings and wants to ensure she can grow part of it for a potential legacy while securing her required living expenses. It is possible for her to split that amount, transferring $250K into a fixed income annuity with a lifetime income rider that guarantees her required living expenses regardless of market volatility. However, this option comes with a fee and a surrender period, but Betty can start receiving her lifetime income at age 65, when she plans to fully retire.
The positive aspect of this strategy is that the remaining $250K can stay in her IRA for growth and fulfill her legacy goals. This strategy is effective if the priority is guaranteed income, and the fear of loss is the primary concern.
Elaine King, MBA, CFP®, CDFA™, CFBA, ACCFounder of Family and Money Matters™Elaine King, CFP®, founder of Family and Money Matters™, empowers families’ financial and human capital for wellbeing. She’s crafted actionable plans for 1,200+ families and 100+ enterprises. A recognized financial education advocate, creator of LATAM’s first family financial program and winner of the Best Latin Book Award. Featured in top publications and honored by Investopedia and People Magazine.
Using Annuities To Delay Required Minimum Distributions
A common objective for purchasing an annuity within a traditional IRA is to defer taking required minimum distributions (RMDs) from the IRA. RMDs 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.
For some people, taking distributions from their IRA at age 73 doesn’t make sense. You might be in good health, still working and not ready to retire and live off your savings.
In this case, you might decide to purchase a qualified longevity annuity contract (QLAC), which is a deferred lifetime annuity purchased with funds from a qualified retirement plan like an IRA. When you have a QLAC in your IRA, you can delay taking distributions from your retirement account until age 85. When you do begin distributions, you’ll receive guaranteed income for life from the annuity.
Unlike most other annuities, QLACs do have contribution limits. The IRS currently places a lifetime cap of $210,000 that can be invested into QLACs, but it will adjust this amount for inflation in the future. You can purchase multiple QLACs and spread the premiums out as long as the total amount you’ve purchased does not exceed the limit.
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What Annuity Is Best To Hold Inside an IRA?
A fixed deferred annuity is the best type of annuity to hold inside an IRA. QLACs are fixed deferred annuities and are designed specifically to be held inside IRAs.
Many experts recommend that as you get closer to retirement, the balance of assets in your retirement portfolio should shift from more risky to more conservative. Some investors might choose to allocate a portion of their IRA portfolio toward fixed-rate options like bonds or CDs.
This safe investment section of an IRA portfolio is the role a fixed annuity is best suited to fill. “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.
A fixed annuity offers the principal protection and fixed-rate growth of bonds or CDs, along with an additional benefit: the option to create a guaranteed lifetime income. Annuitizing a portion of your IRA means you won’t have to worry about running out of money later into your retirement. Plus, you can delay taking RMDs if you have an annuity in your IRA, which could help your savings last even longer.
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Frequently Asked Questions About Annuities Inside 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.
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.
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.
