What is an Individual Retirement Annuity?

Definition and Example

How an Annuity Retirement Works

IRA vs. Annuity Retirement

Definition and Example

An annuity retirement is a way to save for retirement by purchasing an annuity contract issued by a life insurance company.

An example of an annuity retirement is a type of retirement contract where you pay premiums and then receive payments along with interest as income in retirement. It is similar to an Individual Retirement Account (IRA), but instead of holding stocks, bonds, and other securities, an annuity retirement only contains fixed or variable insurance.

Alternative name: Personal Annuity

The annuity is issued in your name, and only you or your beneficiaries can receive the payments. You cannot transfer any part of the annuity retirement to anyone else but the issuing entity. You also cannot contribute more than the annual contribution limit for an Individual Retirement Account.

The funds in the annuity retirement can grow tax-deferred, and you must take the required minimum distribution by April 1 of the year following the year you turn 72. An annuity retirement often includes annual fees and/or fund fees and minimum deposit requirements.

Note: Annuities are issued through insurance companies, and you can purchase them from insurance companies, banks, or brokers.

How an Annuity Retirement Works

An annuity retirement works like any insurance. You pay the insurance company an upfront amount, and they agree to pay you back later, with interest.

Many retirees like annuities because they provide tax-deferred growth and a regular income stream in retirement. This type of contract can provide peace of mind for individuals who are unsure if Social Security or other retirement benefits will be sufficient to secure their retirement income.

You can purchase an annuity retirement from a life insurance company. It can contain fixed or variable insurance. This contrasts with Individual Retirement Accounts (IRAs), which can hold a broader range of assets, such as stocks and bonds.

Fixed annuities guarantee a minimum rate of return and a specific number of payments. Variable annuities invest your premiums in mutual funds of your choice. The rate of return and number of payments depend on the performance of your investments. Indexed annuities have a combination of features from both fixed and variable annuities.

The Internal Revenue Service (IRS) has specific rules regarding individual retirement annuities.

IRA vs. Annuity Retirement

Individual retirement annuities are similar to Individual Retirement Accounts (IRAs). Both:

• Help you save for retirement
• Have the same annual contribution limits
• Can be opened as traditional accounts (if you want tax benefits now) or Roth accounts (if you want tax benefits in retirement)

However, individual retirement annuities can only hold the fixed or variable insurance offered by the insurance company. In contrast, Individual Retirement Accounts can include a wide range of investments, including annuities but also stocks, bonds, mutual funds, ETF funds, and real estate.

The insurance payments are guaranteed by the insurance company for a specified period, although monthly payments may change if you have a variable annuity. Conversely, the funds held in an Individual Retirement Account are not guaranteed and can lose value depending on how they are invested.

Key Takeaways

An annuity retirement is a contract from a life insurance company that provides regular payments during your retirement years. An annuity retirement has the same contribution limits, withdrawal rules, and distribution requirements as an Individual Retirement Account (IRA). An annuity retirement tends to have higher fees than IRAs, but it also has the potential to provide reliable income in retirement.

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Source: https://www.thebalancemoney.com/what-is-an-individual-retirement-annuity-5324047

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