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Individual Retirement Annuities

Individual retirement annuities are investment vehicles sold by insurance companies that work similarly to an individual retirement account (IRA), providing retirees with a steady income stream. Like other annuities, an individual retirement annuity is a contract between an individual and an insurance company. The individual contributes an agreed-upon amount, and the insurer commits to returning the money with interest at a future date, either as a lump sum or a series of regular payments. These annuities are purchased to supplement other retirement income, such as Social Security.

Individual retirement annuities can be fixed or variable. Fixed annuities pay a fixed interest rate, while variable annuities base their returns on a portfolio of subaccounts selected by the annuity owner. These subaccounts resemble mutual funds, follow the same strategies, and have similar names, but they are not mutual funds. During what is known as the accumulation phase, money in the annuity account grows tax-deferred (Ref. 1).

Contribution limits

An individual retirement annuity purchased within an IRA has the same contribution limits, catch-up provisions, and basic tax advantages as IRAs. For 2021 and 2022, the annual contribution limit is $6,000 for people under age 50. People over age 50 are eligible for an additional $1,000 catch-up contribution, for a total of $7,000 (Ref. 2).

Like IRAs, individual retirement annuities are available in traditional and Roth versions. With the traditional version, the owner's contributions are generally tax-deductible in the year they are made, but withdrawals are taxed later. The Roth version provides no upfront tax deduction, but later withdrawals may be tax-free (Ref. 3).

Payout phase

When the annuity owner begins receiving regular income from the account, known as the payout phase, that money is taxed as ordinary income for a traditional individual retirement annuity or is not taxed for a Roth. Traditional and Roth IRAs work the same way (Ref. 3).

Several specific rules apply to individual retirement annuities. The annuity must be issued in the owner's name, and only the owner or their surviving beneficiaries are eligible to receive benefits under the contract. The owner's entire interest in the annuity must be fully vested, and the owner cannot transfer any of the balance to another person, although they may name a beneficiary to receive the money after death. Annuity premiums must be flexible so the owner can change payment amounts if their income changes.

Individual retirement annuities have more limited investment options than IRAs, which can invest in many different types of securities.

Individual retirement annuities versus IRAs

The biggest difference between individual retirement annuities and IRAs is the investments they hold. Individual retirement annuities are limited to fixed and variable annuities. Individual retirement accounts (IRAs), on the other hand, can hold a broad range of investments, including stocks, bonds, mutual funds, and real estate. Annuities are also known for often having high fees (Ref. 4, Ref. 1).

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