Individual Retirement Annuities: What They Are & How They Work
An individual retirement annuity is one way to guarantee income in retirement. Individual retirement annuities work similarly to traditional IRAs. The key difference is that you only invest in annuities, whereas an IRA can hold many different types of investments. An individual retirement annuity can come in a variable or fixed format, offering differing levels of risk and reward.
- Written by Christian Simmons
Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.Read More
- Published: March 22, 2023
- Updated: July 6, 2023
- 6 min read time
- This page features 3 Cited Research Articles
- Edited By
- An individual retirement annuity is a way to guarantee income for your retirement.
- Individual retirement annuities work similarly to IRAs but only involve fixed and variable annuities, whereas IRAs can include many investments.
- The same rules that apply to an IRA, such as contribution limits, apply to individual retirement annuities.
What Is an Individual Retirement Annuity?
As the name implies, an individual retirement annuity is similar to an individual retirement account (IRA). The difference is what goes into it.
While IRAs are retirement accounts that can hold varying investments, individual retirement annuities only hold annuities.
This can be a strong option to supplement your income in retirement by creating a guaranteed stream of income. When you purchase an individual retirement annuity, you do so with the intent that it can then provide you with a set stream of payments or payout in retirement.
But that payout can vary depending on the type of product you opt for. For example, if your individual retirement annuity included a fixed annuity, it can offer predictability since the payout will be set and consistent.
The other option, which carries more risk, is a variable annuity. The payout from a variable annuity is tied to the performance of how it is invested, meaning you could stand to profit much more but also take on a lot more risk.
The option that will make the most sense for you will depend on your personal circumstances and how much risk you are willing to take on when it comes to this form of retirement earnings.
How To Get an Individual Retirement Annuity
Like other types of annuities, an individual retirement annuity is a financial product. This means that you will have to purchase one through a private provider.
When doing so, it is important to compare your options to help ensure that you are settling on the product that makes the most sense for you.
Annuities can be complex vehicles and often have many fees attached, so asking questions can help as well. It’s also important to choose a trusted and reliable company.
There also may be eligibility requirements. Individual retirement annuities are meant to provide a stream of guaranteed income in retirement, so buyers are often older.
Private companies that sell annuities may impose age limits on who they are willing to sell a product to.
*Ad: Clicking will take you to our partner Annuity.org.
Benefits of Individual Retirement Annuities
There are many prospective benefits when it comes to opting for an individual retirement annuity. The biggest is the potential for guaranteed income in retirement.
While annuities may not always make sense as a primary vehicle for retirement savings, an individual retirement annuity can help supplement your earnings after you enter your golden years.
- Guaranteed income
- Tax deferral
- Strong supplemental option
- Varying levels of risk
Another pro of an individual retirement annuity is its tax advantages. These products are tax-deferred, meaning you will pay taxes on your withdrawals instead of your contributions.
Depending on your personal situation, this may allow you to take advantage of a lower tax bracket when you are making your withdrawals.
Individual retirement annuities also give you the opportunity to assume a level of risk that you feel comfortable with. Fixed annuities can provide you with set (but less lucrative) payments while variable annuities can offer you a bigger potential reward tied to a higher risk.
Drawbacks of Individual Retirement Annuities
As with any financial product, there are drawbacks to be aware of when it comes to individual retirement annuities. They may not be suitable investments for everyone.
One major con is the lack of diversity when it comes to investment. A traditional IRA can hold all sorts of investments, like stocks and bonds. An individual retirement annuity, on the other hand, only holds. annuities.
- Fewer investment options than traditional annuities
- Must adhere to same rules as IRAs
- Potential for high fees
Despite the limited investment options, it comes with the same contribution limitations as an IRA. According to the Internal Revenue Service, the contribution limit for an IRA in 2023 is $6,500, or $7,500 if you are 50 or older.
It’s also worth noting that IRAs can hold annuities as well.
Factors To Consider When Choosing an Individual Retirement Annuity
Annuities do not automatically make sense for everyone and may not be a suitable investment for you. Whether an individual retirement annuity makes sense as part of your retirement savings strategy will depend on your personal circumstances.
Some big factors to consider are your age, health and life expectancy. The great advantage of annuities is their ability to guarantee income that can last for the rest of your life.
The longer you live, and the longer the payments keep coming, the better of an investment it is. So, it may not make sense for someone with serious health conditions or who does not expect to have a long retirement to invest in a financial product that is more valuable the longer it’s active.
Risk tolerance is another factor to take into account when considering the purchase of an individual retirement annuity. Variable annuities in particular can carry a lot of risk. If you intend to heavily rely on these payments in retirement, there may be other avenues to invest your money in that includes less inherent risk.
You may also want to consider how important liquidity is to you. It can be difficult, or even impossible, to cash out an active annuity that is distributing payments.
*Ad: Clicking will take you to our partner Annuity.org.
Individual Retirement Annuities vs. Other Retirement Options
Individual retirement annuities and standard IRAs are similar in many ways. They even adhere to the same rules and contribution limits.
But there are key differences, mainly around what type of investments they can hold. Individual retirement annuities are focused just on annuities, while IRAs can hold many different types of retirement investments.
IRAs may also make more sense as a primary savings vehicle for retirement due to the diversity of assets they can hold. An individual retirement annuity may be more useful serving as a supplementary option.
Another option is the potential of placing an annuity directly into an IRA as one of the investments it holds. This could help you get the best of both worlds.
It’s also important to remember that an individual retirement annuity is not just an account that contains investments but a financial product that is purchased through a private provider.
Frequently Asked Questions About Individual Retirement Annuities
3 Cited Research Articles
- U.S. Securities and Exchange Commission. (2023, February 24). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
- Office of the Law Revision Council. (2022, December 28). Individual Retirement Accounts. Retrieved from https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section408&num=0&edition=prelim
- Internal Revenue Service. (2022, December 21). Retirement Topics – IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
Calling this number connects you to one of our trusted partners.
If you're interested in help navigating your options, a representative will provide you with a free, no-obligation consultation.
Our partners are committed to excellent customer service. They can match you with a qualified professional for your unique objectives.
We/Our Partners do not offer every plan available in your area. Any information provided is limited to those plans offered in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.844-359-1705