Individual Retirement Annuities – A Closer Look At What They Are

individual retirement annuities

An individual retirement annuity is a retirement savings vehicle issued by life insurance companies. The individual retirement annuity can come in fixed or variable flavors. Similar to traditional and Roth IRAs, it works much like any individual retirement account (IRA) and is subject to contribution limits.

The retirement annuity offers a steady income stream to its owners, and it can have higher fees than IRAs. You can check with your financial professional for more details on that. The retirement annuity, like an IRA, is available in both traditional and Roth versions.

Therefore, the annuity owner can take the upfront contribution deduction available to the traditional account. Or they can choose to receive tax-free income at retirement. With the private pension rapidly disappearing, creating your own pension-style payment stream may be a good idea for you.

How Do Individual Retirement Annuities Work?

As with all annuities, an individual retirement annuity is a contract between someone and a life insurance company for a stream of income. The individual purchases the annuity by contributing an agreed-upon amount.

The insurer/issuer promises to pay the money back, per the contract terms, with interest or investment income, at an agreed time in the future. Fixed annuities receive only interest, while a variable annuity can generate interest and investment income.

An individual retirement annuity can be fixed or variable. The fixed annuity pays a guaranteed interest rate. In contrast, a variable annuity allows the owner to place funds in selected subaccounts, including the general account that pays only interest.

The variable annuity owner chooses the subaccounts (similar to mutual funds) and whether to place funds in the general account. The funds in the general account receive a guaranteed interest rate but don’t see gains or losses in the markets. On the other hand, the subaccount funds can lose value.

Fixed Versus Variable Annuities

Your fixed individual retirement annuity will offer a guaranteed rate and stream of income with no risk of market loss. A variable annuity, in contrast, is an insurance product and a security product.

It puts a portion of the money you deposit into it at risk of loss in the securities markets. We noted above that the subaccounts are similar to mutual funds. One way that they are similar to mutual funds is that you can lose money as well as make it.

Most variable annuities either have a small guarantee or permit the owner to put funds in the general account, producing a guaranteed rate. You should be aware, though, that for either kind of annuity, the guarantee is based solely on the claims-paying ability of the issuing insurance company. So, do your due diligence when shopping around for an individual retirement annuity.

Traditional Versus Roth Flavors

As with IRAs, your individual retirement annuity can be a traditional or Roth account. You can generally make tax-deductible contributions for each tax year with a traditional retirement account. Neither your contributions nor your earnings will be taxed until you withdraw them in retirement.

Conversely, the Roth account requires that you make your contributions with post-tax dollars. However, once you meet the necessary qualifications, you can withdraw your income and earnings tax-free when you retire.

The Accumulation Phase

While the individual retirement annuity builds up assets through your annual contributions, the interest or investment income grows tax-deferred.

However, unlike other annuities, the retirement annuity is subject to the same contribution limitations as an IRA. It also allows for catch-up provisions, for those age 50 and beyond, and gives the same tax advantages as an IRA.

The limitation applies to your traditional and Roth retirement annuities. An IRA can invest in almost everything, but your retirement annuity is limited to only different annuity types.

The Distribution Phase

For traditional individual retirement annuities and IRAs, account withdrawals are subject to income tax at the time you withdraw money. Further, if you withdraw money from either before reaching 59.5, a 10% federal tax penalty applies to the amount withdrawn.

Finally, the Internal Revenue Services (IRS) requires you to begin taking distributions (RMDs) no later than April 1 of the year in which your RMD is first triggered. The age at which you start required minimum distributions will depend on your age now.

If you were born on June 30, 1949 or earlier, you have already started RMDs at 70.5 and will have to continue taking them. For those born on July 1, 1949, through and including December 31, 1950, RMDs would have started at age 72. If you were born on January 1, 1951, through and including December 31, 1959, the age for starting your RMDs is 73. For those born on January 1, 1960 or later, an elevated age for starting RMDs at 75 will come into effect in another 10 years (2033).  

For Roth accounts, withdrawals of contributions are never subject to tax because the dollars were taxed before they went into the account. Withdrawals of income are tax-free so long as you make the withdrawal at least five years after your first contribution and are at least 59.5.

There are no RMDs on a Roth, with the only mandatory distributions being after your death.

Other Individual Retirement Annuity Issues

There are other requirements for creating an individual retirement annuity. Some of these are:

  • The annuity must be issued solely in the owner’s name. However, you can create a spousal individual retirement annuity.
  • The annuity premiums must allow the owner to change the payment amounts on premiums in response to changes in the owner’s income.
  • The entire value of the annuity must eventually be distributed to the owner or the surviving beneficiaries. No other party can receive benefits from or inherit the contracts.

Does an Individual Retirement Annuity Make Sense for You?

An individual retirement annuity can help you accumulate additional assets for retirement, alongside an IRA or even a workplace retirement plan. Generally speaking, an annuity (especially those of the fixed variety) will have lower levels of risk and growth potential than a securities product. You will be able to hold mutual funds and other securities-type products inside your IRA.

On the other hand, an annuity provides guaranteed income, which mutual funds and other securities don’t. The question of whether an individual retirement annuity makes sense for you depends on your financial picture, risk tolerance, long-term goals, and need for liquidity, among other things. It can be a good supplement to other retirement savings vehicles which you may use.

Ask your financial professional about the pros and cons of an annuity for your retirement picture. What if you are looking for a financial professional to help you work through your personal, financial what-ifs or give a second opinion of your current plan?

No sweat, many independent and experienced financial professionals are available at to assist you. Use our “Find a Financial Professional” section to get started and connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and explore a potential working relationship. Should you need a personal referral, call us at 877.476.9723.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member