What's the difference between an individual retirement account (IRA) and an annuity?

Annuities, IRAs
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October 2016
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An IRA is a type of account that people save money in and provides tax advantages (various depending on type of IRA, ROTH, Traditional). Some people confuse it for a type of investment. It is actually more of a vehicle that allows you to hold the investments with the various tax advantages. People commonly invest in stocks, bonds, and mutual funds inside the IRAs. Other options are sometimes available but can get complicated and messy. The IRS places some income limits on tax benefits of IRAs as well as contribution limits. See here for more info on that... https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1

Annuities are contracts with insurance companies. They often come with some level of guarantee, but typically at a much higher fee.  A fixed annuity will pay out a predetermined amount based on the contract.  A variable annuity allows you to invest money in the market (stocks, bonds, funds...).  Annuities don't have income/contribution limits. They do have similar tax advantages as an IRA (tax deferred growth until you withdraw the money). Here is some info about taxation and annuities.  https://www.irs.gov/publications/p575/

Both provide potential tax advantages/deferred growth. Both have penalties for withdrawing money prior to 59 1/2.  Things to consider when debating between the two: age, income levels (current and future), FEES, credit worthiness of insurance provider, your risk tolerance, your level of involvement you desire...

At the end of the day, you should understand what you're buying, the fees, and the risks before taking any action.

October 2016
October 2016
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