Comparing an annuity to an IRA is a little like comparing a car to a garage. An IRA is a tax-advantaged account, and an annuity is a product, an insurance contract with guarantees. You can hold an annuity inside an IRA, or buy one with after-tax money outside of one. The real question is not which to choose, but what each one does for you.
What is the difference between an annuity and an IRA?
An IRA (individual retirement account) is a tax wrapper set up under IRS rules, while an annuity is a contract with an insurance company that can guarantee growth or lifetime income. The IRA defines how money is taxed going in and coming out. What you hold inside it can be funds, stocks, bonds, CDs, or an annuity.
An annuity defines what happens to the money itself: a rate the insurer guarantees for a set term, index-linked growth with a 0% floor, or a stream of income that lasts as long as you live. When an annuity is held inside an IRA, it is called a qualified annuity, and the IRA's tax rules apply. When it is bought with money that has already been taxed, outside any retirement account, it is a non-qualified annuity with its own tax rules. Our primer on what an annuity is explains the main types.
How do IRAs and annuities compare side by side?
The main tradeoffs are contribution limits, tax treatment, and required distributions.
| Feature | Traditional IRA | Roth IRA | Non-qualified annuity |
|---|---|---|---|
| What it is | Tax-advantaged account | Tax-advantaged account | Insurance contract bought with after-tax money |
| Contribution limit | IRS annual limit | IRS annual limit, with income limits | No IRS limit; insurer sets maximums |
| Earned income required | Yes | Yes | No |
| Tax on growth | Deferred | None on qualified withdrawals | Deferred |
| Tax on withdrawals | Ordinary income on the whole amount | Tax-free if qualified | Ordinary income on earnings only |
| 10% penalty before 59½ | Yes, with exceptions | On earnings, with exceptions | On earnings, with exceptions |
| Required minimum distributions | Yes, starting at 73 under SECURE 2.0 | None for the original owner | None during the owner's lifetime |
| Guaranteed lifetime income | Only if it holds an annuity | Only if it holds an annuity | Available |
Can you put an annuity in an IRA?
Yes, you can buy an annuity inside a traditional or Roth IRA, and it is one of the most common ways annuities are owned. In that setup the insurance company acts as the IRA custodian, and the annuity contract is the IRA. You can fund it with a new contribution, a transfer from another IRA, or a rollover from a 401(k) or similar workplace plan.
A direct transfer or direct rollover keeps the move tax-free. Our guide on rolling a 401(k) into an annuity walks through how that works, and the comparison of an annuity vs. a 401(k) covers when the two work together.
Does it make sense to buy an annuity inside an IRA if it is already tax-deferred?
It can, but only for the annuity's guarantees, because the tax deferral is redundant inside an IRA. An IRA already shelters growth from yearly taxes. Putting an annuity inside one adds no extra tax benefit, so tax deferral alone is never a reason to buy one there.
What an annuity adds inside an IRA is something the account cannot do on its own:
- A guaranteed rate for a set term, through a MYGA (multi-year guaranteed annuity), protected from market drops.
- Index-linked growth with a 0% floor, through a fixed indexed annuity.
- Guaranteed lifetime income, through an income annuity or an income rider.
If none of those matter to you, a lower-cost holding inside the IRA may do the same job. If you are retiring and want part of your IRA turned into a paycheck you cannot outlive, the annuity is doing real work. Surrender charges still apply inside an IRA, so the term needs to match when you expect to need the money.
How is a non-qualified annuity different from an IRA?
A non-qualified annuity is bought with after-tax money and has no IRS contribution limit, no earned-income requirement, and no required minimum distributions during your lifetime. That makes it a common next stop for people who have already maxed out their IRA and workplace plan, or who have a lump sum from a home sale, an inheritance, or a maturing CD.
Interest grows tax-deferred until you withdraw it. Because you already paid tax on the premium, only the earnings are taxed, as ordinary income rather than capital gains. IRS rules generally treat withdrawals as coming from earnings first, and taxable amounts taken before 59½ can face a 10% additional tax. Our annuity taxes guide covers the details.
How do RMDs work for an annuity held in an IRA?
An annuity inside a traditional IRA is subject to required minimum distributions (RMDs), which under the SECURE 2.0 Act generally begin at age 73. The RMD is generally based on the contract's value at the end of the prior year, and IRS rules can require certain guaranteed benefits to be counted in that value. Many fixed and fixed indexed annuities waive surrender charges on withdrawals needed to satisfy the RMD for that contract, but confirm that in the contract before buying.
If the annuity has been turned into lifetime income payments, those payments generally count toward the RMD. A special type of deferred income annuity, a qualifying longevity annuity contract (QLAC), lets you set aside part of your IRA and exclude it from RMD calculations until income begins, which can be as late as age 85.
Can you hold an annuity in a Roth IRA?
Yes, and the combination can produce tax-free income, since qualified Roth IRA withdrawals (generally after age 59½ and once the account has been open five years) owe no federal income tax. A Roth IRA also has no RMDs for the original owner, so an annuity inside one can keep growing as long as you like.
Some people convert a traditional IRA annuity to a Roth. That conversion is taxable, and the value used for tax purposes may include the value of certain riders, not just the account balance. Our guide to Roth conversions explains how they work and what to ask the insurer.
Should you use an IRA, an annuity, or both?
For most retirement savers the answer is both: the IRA as the tax-advantaged account, and an annuity as one option inside it or alongside it.
An annuity, in or out of an IRA, tends to fit when:
- You want part of your savings protected from market losses.
- You want guaranteed income for life to cover essential bills.
- You have maxed out your IRA and workplace plan and want more tax-deferred growth.
An annuity is usually a poor fit when:
- You need the money within the surrender period.
- The only appeal is tax deferral and the money is already in an IRA.
- You are young and building savings with decades of growth ahead.
You can compare guaranteed rates on our rates page, browse our fixed indexed annuity reviews, or try our free comparison tools. A licensed advisor can walk through an IRA annuity with you on a call, and a tax professional can confirm how the rules apply to your situation.
Sources
- Internal Revenue Service, Publication 590-A, Contributions to Individual Retirement Arrangements
- Internal Revenue Service, Publication 590-B, Distributions from Individual Retirement Arrangements
- Internal Revenue Service, Publication 575, Pension and Annuity Income
- SECURE 2.0 Act of 2022
- U.S. Securities and Exchange Commission, Investor Bulletin on annuities
- FINRA, Investor Insights on annuities