Individual Retirement Annuity

DEFINITION of 'Individual Retirement Annuity'

An individual retirement annuity is a retirement investment vehicle similar to an IRA except that it must involve an annuity and is not actively managed. Individual retirement annuities have the same contribution limits, tax advantages and catch-up provisions as an individual retirement account (IRA). They must be issued in the owner's name, and only the annuity owner or their surviving beneficiaries are eligible to receive benefits from the contract.

BREAKING DOWN 'Individual Retirement Annuity'

Individual retirement annuity contracts are essentially tax-deferred or pre-tax personal retirement plans. They can be used to generate income in retirement for an annuitant/owner and may be invested in either a fixed annuity or a variable annuity.

A number of specific requirements apply to individual retirement annuities. For instance, the owner's entire interest in the annuity must be fully vested, and the owner is not allowed to transfer any of the balance to another person (though a beneficiary may be named). This type of investment account must allow for flexible premiums, and annual contributions are capped at a specified maximum, which is $5,500 as of 2018 (ages 49 and under) and $6,500 for those ages 50 and older ($1,000 higher due to a catch-up contribution allowance). Distributions from this type of annuity must be made before April 1 of the year in which the owner reaches the age of 70½.

Individual Retirement Annuity vs. IRA

Individual retirement annuities, like individual retirement accounts, are available in the same varieties: traditional (both deductible and non-deductible) and Roth. They differ in how they are funded, how withdrawals are taxed and what they may invest in. The biggest difference between individual retirement annuities and IRAs is that the latter is open to whatever investments are offered by an account custodian, whereas the former is limited to fixed and variable annuities only.

Individual Retirement Annuity Advantages

An individual retirement annuity can help individuals in two main ways: Those who are not eligible for an employee-sponsored retirement savings and investment plan can use them to generate income in retirement. Also, they may offer advantages in deductibility of an initial contribution amount that some individuals would not otherwise have access to because of their income level. Some other advantages of individual retirement annuities include:

  • Funds are always available to the annuity owner.
  • They may be created and funded independently of an employer sponsor.
  • Taxes on contributions and earnings are not due until retirement/withdrawal.

Rules governing individual retirement annuities may be found in Title 26, Subsection 408 of the U.S. Code.