Individual Retirement Annuities

An individual retirement annuity is a type of investment vehicle that offers tax benefits similar to an individual retirement account (IRA). While IRAs can hold nearly any type of investment, individual retirement annuities are designed to hold only fixed and variable annuities. Both types of investment vehicles can help you plan and save for retirement.

Thomas Brock, CFA, CPA, expert contributor to Annuity.org
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Brock, T. J. (2022, March 31). Individual Retirement Annuities. Annuity.org. Retrieved May 25, 2022, from https://www.annuity.org/annuities/types/individual-retirement-annuities/

MLA Brock, Thomas J. "Individual Retirement Annuities." Annuity.org, 31 Mar 2022, https://www.annuity.org/annuities/types/individual-retirement-annuities/.

Chicago Brock, Thomas J. "Individual Retirement Annuities." Annuity.org. Last modified March 31, 2022. https://www.annuity.org/annuities/types/individual-retirement-annuities/.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Annuity.org has provided reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities and financial literacy topics using plain, straightforward language.

Our Partnerships, Vision and Goals

We pride ourselves on partnering with professionals like those from Senior Market Sales (SMS) — a market leader with over 30 years of experience in the insurance industry — who offer personalized retirement solutions for consumers across the country. Our relationships with partners including SMS and Insuractive, the company’s consumer-facing branch, allow us to facilitate the sale of annuities and other retirement-oriented financial products to consumers who are looking to purchase safe and reliable solutions to fill gaps in their retirement income. We are compensated when we produce legitimate inquiries, and that compensation helps make Annuity.org an even stronger resource for our audience. We may also, at times, sell lead data to partners in our network in order to best connect consumers to the information they request. Readers are in no way obligated to use our partners’ services to access the free resources on Annuity.org.

Annuity.org carefully selects partners who share a common goal of educating consumers and helping them select the most appropriate product for their unique financial and lifestyle goals. Our network of advisors will never recommend products that are not right for the consumer, nor will Annuity.org. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish.

Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.

What Is an Individual Retirement Annuity?

An individual retirement annuity is an investment vehicle sold by insurance companies that holds fixed and variable annuities. The arrangement offers tax advantages to investors and the opportunity to generate a steady stream of income in retirement.

An individual retirement annuity is similar to an individual retirement account (IRA), but the annuity option holds different types of assets than IRAs. While an IRA can hold virtually any type of asset, including stocks, bonds and alternative investments, an individual retirement annuity can only hold annuities.

Both IRAs and individual retirement annuities are designed to help you save for retirement, and both options can be implemented with traditional and Roth structures, which offer unique tax advantages. Read on to learn more about how these annuities are structured and how the contributions and payouts work.

How Do Individual Retirement Annuities Work?

An individual retirement annuity works like a typical annuity. When you buy an individual retirement annuity, you enter into a financial contract with the insurance company, and you become known as the annuitant. In exchange for an upfront payment, the annuitant will receive a series of income distributions from the insurance company, either immediately or after a specified period of time.

Individual retirement annuities can take the form of a fixed annuity or a variable annuity. A fixed annuity offers a guaranteed rate and/or stream of income with no downside risk, meaning that the payout amount and time period of distribution will remain constant. A variable annuity offers rates and payouts that fluctuate depending on the performance of investments chosen by you. Ultimately, variable annuities offer more upside potential than fixed annuities, but they also come with higher fees and the possibility that you may lose money.

Both types of annuities are generally illiquid, which means that they are not easily convertible into cash, and both types can also be adversely impacted by inflation. Nevertheless, under the right circumstances, either fixed or variable annuities could be used in an individual retirement annuity to bolster your retirement plan.

Traditional and Roth Structures

Like IRAs, individual retirement annuities are available in both traditional and Roth structures. With a traditional structure, your contributions are generally tax-deductible in the year that you make them. Your contributions and any cumulative earnings are not taxed until you withdraw them in retirement. In a Roth structure, your contributions do not receive an up-front tax deduction, but all qualifying withdrawals you make in retirement will be exempt from taxation.

Contribution Limits

Individual retirement annuities have the same contribution limits and catch-up provisions as IRAs. For 2021 and 2022, the annual contribution limit set by the Internal Revenue Service (IRS) is $6,000 for people under age 50 and $7,000 for people who are aged 50 and over by the end of the year. This limit applies to both traditional and Roth structures and is applied to your contributions.

Distribution Guidelines

For traditional individual retirement annuities and IRAs, withdrawals are subject to income tax at your ordinary income tax rate at the time the withdrawal is made. If you withdraw money before age 59½, a 10% federal tax penalty applies. Additionally, the IRS requires you to begin taking distributions no later than April 1 of the calendar year after the year in which you turn age 72.

For individual retirement annuities and IRAs with a Roth structure, withdrawals of contributions are not subject to income tax. Moreover, withdrawals of any earnings generated on the contributions are not subject to taxation — as long as the withdrawals are taken at least five years after your first contribution, and you have attained the age of 59½. With a Roth vehicle, you as the annuitant are not required to begin taking distributions at any specific age, and mandatory distributions are required only upon your death.

Other Guidelines

In addition to the contribution limits and distribution guidelines covered earlier, individual retirement annuities have a number of other limitations, including those outlined below.

  • The underlying annuity must be issued in the owner's name. However, spousal individual retirement annuities can be created.
  • The full value of the annuity must be distributed to the annuitant or surviving beneficiaries. No other parties can receive benefits from the contract.
  • Annuity premiums must be flexible to allow the owner to change the payment amounts in response to income fluctuations.
Choose Your Path to Financial Security
Our financial experts can help you choose the best annuity to fit your goals.

Individual Retirement Annuities vs. IRAs

Individual retirement annuities and IRAs are similar, but they have a few notable differences. The biggest difference relates to the types of assets they hold. Individual retirement annuities only hold fixed and variable annuities, while IRAs can hold virtually any type of asset, including stocks, bonds, alternative investments and even annuities.

As a result of this fundamental difference, the two vehicles have different risk-return profiles. Generally, annuities have lower levels of risk and return — with the potential for guaranteed income. IRAs can be structured to have much higher levels of risk and return, and their profiles can be adjusted relatively easily over time.

Another notable difference relates to fees. Individual retirement annuities often have higher fee structures than IRAs. The discrepancy is particularly noticeable when IRAs are implemented with low-cost, passively managed investments, such as index mutual funds and exchange-traded funds.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: March 31, 2022

5 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. Internal Revenue Service. (2021, November 27). Retirement Topics - IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. Internal Revenue Service. (2021, November 5). Traditional and Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-and-roth-iras
  3. Investor.gov. (n.d.). Exchange-Traded Fund (ETF). Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/exchange-traded-fund-etf
  4. Investor.gov. (n.d.). Mutual Funds. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-funds
  5. Investor.gov. (n.d.). Risk and Return. Retrieved from https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/risk-and-return