What is an IRA?
IRAs take a different approach to retirement saving. These accounts are offered by brokerage firms. Instead of paying premiums, you contribute money to your IRA directly, up to the annual contribution limit. For 2022, the limit is $6,000 ($7,000 if you’ll be 50 or older by year-end).
Contributions to “traditional” IRAs are tax-deductible; with Roth IRAs you contribute after-tax dollars. Either way, your money grows tax deferred and can be invested in mutual funds, exchange-traded funds (ETFs) or any other investment your brokerage firm offers. Beginning at age 59½, you can typically withdraw from your IRA without triggering a 10% early-withdrawal penalty.
Whether you owe taxes on withdrawals at age 59½ or later depends on the type of IRA:
Traditional IRA withdrawals (including ones made from SEP and SIMPLE IRAs if you’re self-employed) are taxable at your ordinary income tax rate.
Roth IRA qualified withdrawals are 100% tax free.
Note that required minimum distributions (RMDs) kick in after age 72 (unless you reached 70½ in 2019): You must start taking money from your traditional IRA each year. The amount is based on your account balance and life expectancy. (Roth IRAs don’t have that requirement.)
What's the difference between an annuity and an IRA?
Annuities provide guaranteed retirement income. You make a lump-sum payment or multiple payments. In exchange, you get money to live on in retirement. IRAs require you to make contributions and decide how to invest that money and when to take distributions. An IRA’s return on investment may vary depending on the market and how you choose to invest the money, but it does give you more flexibility.
Can I roll an annuity into an IRA?
If you start out with a variable annuity and later decide you’d prefer to put that money into an IRA, you may be able to roll it over. If the account was set up with pre-tax dollars, you may be able to roll it into a traditional IRA. If it was set up with after-tax dollars, you may be able to roll it into a Roth IRA.
Annuity vs. IRA: Which should you use for retirement?
An annuity may be appropriate if you want guaranteed income. With an IRA, it’s up to you to decide when to make withdrawals. It’s also worth noting that if you’re saving in a traditional IRA and forget to take required minimum distributions, you can be hit with a tax penalty.
Ultimately, whether to choose an annuity or IRA depends largely on your retirement goals. If you want the certainty of guaranteed income, an annuity can deliver. An IRA might be preferable if you’re looking for more flexibility in choosing investments.