Let’s look at the facts before we get to the question of should or shouldn’t you have an annuity in your IRA. Not all annuities are appropriate investments for an IRA. Like other investments, annuities have fees and expenses. The fees in addition to any custodial fees an investor may pay for the IRA can eat into the growth of your investment over time.
When considering an annuity product inside an IRA, you should focus on the two unique characteristics an annuity contract offers: first, the risk transfer. Investors with a limited amount of money can transfer the risk of outliving their money to the insurance company. An annuity contract has the unique ability to provide an infinite payout distribution over someone’s lifetime based upon a finite premium deposit. In certain situations, the guarantee that the payout could be much greater than the original premium is worth considering. In contrast, with traditional investments like stocks or mutual funds, an investor has no assurance that his IRA money lasts until his death. Some investors prefer an annuity because they don’t feel they are able to manage their money well enough on their own. The certainty of income that remains constant is part of the risk transfer.
The specific annuity contract that can best deliver this characteristic is a Single Premium Immediate Annuity. A Single Premium Immediate Annuity is the only investment vehicle that can guarantee investors that they will not outlive their income stream. There are also payout options available that allow individuals the ability to protect their beneficiaries from the risk of a premature death and inflation. The search for the best available Single Premium Immediate Annuity can is to find the highest rate of distribution from the highest rated insurance company. If the client has medical issues, some insurance companies even increase the payout based on poor health.
The second characteristic that should be considered when deciding on an annuity option inside an IRA is the guarantees. The fixed and indexed annuities have guaranteed protection of the original principal that is provided by the insurance company. These are established at the outset of the annuity contract. This means that the investor can at least feel at ease knowing that they will get back their original investment plus interest. Additionally, annuities can have very attractive guaranteed rates of return when compared to other fixed-income instruments, CDs and money market accounts. However, a thorough review of the financial strength of the insurance company backing the guarantees needs to be weighed heavily when determining which product to use.
So the question remains, should you use an annuity in your IRA? With an annuity, an investor trades higher fees and often less than market returns for the guaranteed income. In my nearly 20 years in finance, I have never seen a time where it pays to have an annuity inside an IRA. However, I’ve been told to never say never.