A:

Individual Retirement Accounts (IRAs) and annuities both provide the opportunity to grow money on a tax-deferred basis, but there are differences between the two. An IRA can be thought of as an individual savings account with tax benefits. You open an IRA for yourself (that's why it's called an individual retirement account) and if you have a spouse, you'll have to open separate accounts. An important distinction to make is that an IRA is not an investment itself; rather, it is an account where you keep investments such as stocks, bonds and mutual funds. You get to choose the investments in the account, and can change the investments if you wish. Your return depends on the performance of the investments held in the IRA. An IRA continues to accumulate contributions and interest until you reach retirement age, meaning you could have an IRA for decades before making any withdrawals.

IRAs are defined and regulated by the IRS, which sets eligibility requirements, limits on how and when you can make contributions, take distributions, and determines the tax treatment for various the various types of IRAs. For example, for 2014 the maximum you can contribute to your traditional or Roth IRA is the smaller of $5,500 ($6,500 if you're age 50 or older) or your taxable income for the year. Traditional IRA regulations allow you to take early withdrawals under certain circumstances, and if you have a Roth, you can withdraw contributions at any time, but will pay a penalty if you withdraw any interest earnings.

Conversely, annuities are insurance products that provide a source of monthly, quarterly, annual or lump sum income during retirement. An annuity makes periodic payments for a certain amount of time, or until a specified event occurs (for example, the death of the person who receives the payments). Unlike an IRA, which can have only one owner, an annuity can be jointly owned. Annuities do not have the annual contribution limits and income restrictions that IRAs have.

You can “fund” an annuity all at once – known as a single premium – or you can pay over time. With an immediate annuity (also called an income annuity), fixed payments begin as soon as the investment is made. If you invest in a deferred annuity, the principal you invest grows for a specific period of time until you begin taking withdrawals – typically during retirement. Annuities typically have higher expenses than IRAs, and if you take early withdrawals you'll owe a penalty.

RELATED FAQS
  1. What's the difference between an individual retirement account (IRA) and a certificate ...

    Both individual retirement accounts (IRA) and certificates of deposit (CD) are useful savings instruments, but they have ... Read Answer >>
  2. Are Simple IRA taxes the same as traditional IRA taxes?

    Discover the tax difference between a SIMPLE IRA and a traditional IRA before you determine which retirement plan is the ... Read Answer >>
  3. Can I use my IRA savings to start my own savings?

    Find out whether you can withdraw funds from your IRA to start a savings account, and why this is not the wisest use of your ... Read Answer >>
  4. What are the exceptions to the premature withdrawal penalty rules for IRA accounts?

    Generally, if you are under age 59.5 and you withdraw funds from your traditional IRA, you must pay an additional 10% tax ... Read Answer >>
  5. Can a variable annuity be rolled into an IRA?

    Learn how to roll over your variable annuity to an IRA when you retire or change jobs. Here's how to do it without triggering ... Read Answer >>
  6. What is the difference between a ROTH, SEP and Traditional IRA?

    The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. ... Read Answer >>
Related Articles
  1. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
  2. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  3. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Individual Retirement Accounts (IRAs)

    What they are: An individual savings account with tax incentives. Pros: Tax benefits - investments grow tax-deferred and contributions may be deductible; variety of investment options ...
  4. Professionals

    Individual Plans

    Individuals may set up a retirement plan for themselves that are qualified and allow contributions to the plan to be made with pre-tax dollars. Individuals may also purchase investment products ...
  5. Professionals

    IRA Rules and Regulations

    Series 6, IRA Rules and Regulations. In this section: IRA Contribution Catch-Ups, IRA Rollover and Transfer Rules, Penalties for Early Withdrawals from and Excess Contributions to IRAs
  6. Retirement

    Top 10 Mistakes To Avoid On Your IRA

    IRA rules are complicated. It's easy to make mistakes – and they can cost you big time.
  7. Retirement

    How an IRA Works After Retirement

    You've read a lot about saving for your future retirement with IRAs. But what happens to the account when the future is here, and you actually retire?
  8. Financial Advisors

    IRAs: Top Things You Need to Know About Them

    By understanding the major rules for both traditional and Roth IRAs, you'll be prepared to enjoy the benefits of these investment opportunities.
  9. Retirement

    How (And Why) To Open an IRA Now

    Take these simple steps to set up an Individual Retirement Account that will save you tax money and set you up for the future.
  10. Professionals

    IRA Rules and Regulations

    FINRA/NASAA Series 26 Section 4 - IRA Rules and Regulations. In this section IRA contributions and catch-ups, rollover and transfers, penalties for early withdrawals from and excess contributions ...
RELATED TERMS
  1. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  2. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  3. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  4. Individual Retirement Annuity

    A retirement investment vehicle that is structured similarly ...
  5. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  6. Roth IRA

    An individual retirement plan that bears many similarities to ...

You May Also Like

Trading Center