Annuities in an IRA
by William G. Lako, Jr.
October 10, 2013 11:59 PM | 2485 views | 2 2 comments | 47 47 recommendations | email to a friend | print
William G. Lako Jr.<br>Business Columnist
William G. Lako Jr.
Business Columnist
Opponents of having an annuity inside an IRA point to a simple fact that the IRA account is already tax deferred and say, “What’s the point?” Meanwhile, proponents state that annuities can add value and argue that the tax treatment is “beside the point.”

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.

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Jim W
October 14, 2013
What about a retiree who wants to purchase an annuity with IRA funds? It seems if a person took the price of the annuity out of the IRA, that entire amount becomes immediately taxable. It seems, if you buy the annuity inside the IRA and take distributions from it over time, you would spread the tax effect over the life of the annuity by paying the tax on the distributed amounts.
William G. Lako
October 24, 2013

You are correct. Taking money out of an IRA to buy an annuity would be a taxable event. I’m not advocating investors do that. You are also correct that buying an annuity inside the IRA could spread the tax effect over time. However, as an investment adviser, I generally recommend investing the money in the IRA and then pay the taxes due when you withdraw. The funds in a Traditional IRA generally grow tax deferred until they are withdrawn. You don’t need to buy an annuity inside the IRA to get the favorable tax treatment.
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