Annuity Vs. IRA: A Look at the Differences

Investing for your retirement is essential, and, fortunately, you’ll have multiple vehicles available to you as you prepare. The option you select often comes down to your risk tolerance and the age at which you start your retirement planning

Annuities and IRAs are two common funds that individuals use for retirement. Learning what distinguishes an annuity vs. IRA can guide you in the right direction because the two investment methods have some complexities that can make them confusing. 

You’ll want to ask as many questions as possible before you begin to ensure you’re getting involved with the right financial product to meet your needs. This guide will inform you of the differences between annuities and IRAs as you look to plan for your retirement. 

Types of Annuities and IRAs

It’s important to note that annuity and IRA are broad terms that cover various investment formats, particularly when it comes to annuities. Learning about annuity and IRA types can guide you in the right direction as you select the product that will best serve you. Here are some common types:

Fixed Annuity 

The simplest annuity type is a fixed annuity, which behaves much like an insurance policy. You’ll pay a monthly premium into the annuity and receive fixed payments from your plan later. Many individuals select fixed annuities because of the guaranteed income they provide.

Variable Annuity 

A variable annuity provides you with a little more choice because you have some control over where the fund invests your monthly premiums. This form of annuity carries more risk, but it often comes with minimum loss or growth rates to protect you.

Equity-Indexed Annuity 

An equity-indexed annuity is tied to a stock index, such as the S&P 500. These indexes will generally perform similarly to the market as a whole and tend to bounce back after a downturn. You’ll receive a minimum guaranteed interest payment with this type of annuity as well.

Traditional IRA 

You’ll contribute pretax dollars with a traditional IRA. The idea is that you can deduct any contributions you make to your retirement fund from your present-day taxable income and pay tax on the money when you withdraw it later.

Roth IRA 

A Roth IRA is the opposite of a traditional IRA, as you’ll pay tax on your contributions right now, but not when you withdraw it after you retire. 

It’s worth learning about the various types of annuities and IRAs to determine the best investment to make for your future. You can also invest in annuities and IRAs if you want money coming in from multiple places once you retire.

7 Annuity Vs. IRA Differences to Understand

You’ll have some challenging decisions to make as you determine the best way to invest for retirement. Learning about the risks and rewards of each investment type can help as you reach your financial decision. Here’s a look at some annuity vs. IRA differences.

1. Investment Types 

Your IRA is an investment all to itself that’s funded by stocks, bonds, and mutual funds. Variable and equity-indexed annuities are similar, except they cap your potential gains and losses. A fixed annuity is different because it behaves like an insurance policy that guarantees secured payments in retirement. 

2. Growth and Risk 

IRAs offer more significant growth potential because annuities usually have built-in caps. Your IRA won’t protect your investments if they go through a downturn like an annuity, though, so they also carry more risk. 

3. Ability to Convert 

Annuities can convert your retirement savings into a guaranteed income stream that will continue for the rest of your life. IRAs don’t have this feature, as you can outlive the income stream if you don’t plan accurately.

4. Contribution Limits 

There are contribution limits for your IRAs that vary from year to year. The 2021 limit is $6,000, or $7,000 for those 50 and older, so that’s the maximum you can invest in a single year. Annuities don’t have limits, allowing you to invest as much as you wish. 

5. Minimum Distribution Age 

You must begin distributions of your traditional IRA by the time you turn 72 or you’ll start incurring financial penalties. The minimum distribution age doesn’t apply to Roth IRAs, since the plan owner has already paid taxes, or annuities. 

6. Taxes 

Most annuities are taxed the same way as traditional IRAs, as you’ll pay income tax on the installments you receive. You can get a Roth IRA Annuity that allows tax-free growth, though. There are positives and negatives associated with both tax formats, so you’ll want to carefully consider which type would work best in your situation.

7. Guaranteed Income 

Many annuities offer a guaranteed income in retirement that you can count on month after month. This guaranteed amount is preferable for some investors because it provides more certainty when you’re no longer working. IRAs don’t offer a guaranteed income, but they extend a higher ceiling on your return. 

Learning the pros and cons of an annuity vs. IRA can help you make important decisions as you inch closer to retirement. It’s also possible to use a hybrid model where you begin paying annuity premiums after maxing out your IRA for the year if you have additional funds you wish to put away for the future. 

Getting the Investment Help You Need

Your retirement is a significant event in your life because it means you’ll have time to do all the things you couldn’t do while working full time. The annuity vs. IRA debate is only one consideration for how to retire comfortably, and you need informed financial advisors to help you choose the right path.

Bogart Wealth offers retirement planning services in McLean, VA, and the Houston, TX, area. Our team can help as you map out the road to retirement while minimizing your financial stress. Contact Bogart Wealth today for more information on our retirement education, advice, and planning services. 

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
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