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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Night and Day. An IRA is a covered by Title 26 of the US Code of Federal Regulations which means that it is a type of Qualified account. When you set it up, you qualify for an income tax deduction (if you meet the thresholds) for your contribution, and the earnings grow tax-deferred. The intent is that the monies are to be used for your retirement in your 60's, so the IRA imposes an early surrender penalty of 10% + income taxers if you withdraw the monies before then.

An annuity is not a qualified account. You get no tax deduction for setting it up, but the earnings do grow tax deferred indefinitely. If you're under 59 1/2, you'll have to pay a 10% penalty to withdraw funds (in most cases) and the income is taxed as ordinary income.

It is sometimes confusing because some people can buy tax-deferred annuities inside of a tax-deferred IRA account. The IRA account is the "vehicle" and the annuity is the product or gasoline that runs the vehicle.

You are limited as to how much money you can put into an IRA account, but there is no limit to how much you can contribute to an annuity.

Annuities and IRAs are powerful financial planning tools. I have clients that have maxed out the total allowable 401(k) and IRA contributions ($53,000) and still have money left over. In this case, they'll purchase investment-grade annuities with low fees and expenses to grow their tax-deferred savings even more.

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October 2016
October 2016
October 2016