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Annuity Vs. IRA: A Look at the Differences

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    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. 

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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