Annuities as an IRA Investment Option
A deferred annuity is one of several investment options you
can choose from to fund your IRA. You might think that a deferred annuity isn't
suitable as an investment option for an IRA, since both deferred annuities and
IRAs generally provide for the deferral of income taxes on earnings until
they're withdrawn. However, there are several reasons, aside from tax deferral,
that may make a deferred annuity a sound funding choice for your IRA.
Common features of IRAs and deferred annuities
IRAs and deferred annuities share several common features.
Both IRAs and deferred annuities:
- Provide for the deferral of income taxes on gains
(interest, dividends, and earnings) within the account until withdrawn
- Offer varying degrees of creditor protection based on
particular state law
- Are intended as long-term savings options
- Subject the account owner to early withdrawal penalties
unless an exception applies
Many deferred variable annuities offer a variety of
investment options called subaccounts within which you can allocate your
premium payments. A variable annuity's subaccount choices will be described in
detail in the fund prospectus provided by the issuer. However, you assume all the risk related to
subaccount performance, and while you could experience positive growth in the
subaccounts, it's also possible that the subaccounts will perform poorly and
you may lose money, including principal.
Nevertheless, many variable annuities allow you to
reallocate among available subaccounts without cost or restriction. This
feature provides you with investment flexibility, because
each subaccount is typically based on a different investment strategy.
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
But, the common features shared by deferred
annuities and IRAs do not necessarily make them mutually exclusive.
Deferred annuities offer the opportunity to annuitize the
account, which involves exchanging the cash value of the deferred annuity for a
stream of income payments that can last for the lifetimes of the contract owner
and his or her spouse. That can help in retirement by providing a steady,
reliable income. But
converting your account to an income stream means you're generally locked into
those payments unless the annuity provides a commuted benefit option allowing
you to "cash out" the balance of your income payments.
Another income option offered by some deferred annuities
provides guaranteed* income payments without relinquishing the entire cash value
of the annuity. The guaranteed* lifetime withdrawal benefit allows you to
receive an annual income for the rest of your life without having to annuitize
the annuity's entire cash value.
Some deferred annuities offer a rider that provides you with
a minimum income equal to no less than your premium payments less prior
withdrawals. With this rider, you are assured of receiving minimum income
payments based on the premiums you paid into your annuity, even if the
annuity's accumulation value has dipped below your investment in the contract due to poor investment performance.
Deferred annuities may offer protection of your principal.
Fixed deferred annuities guarantee* your principal and a minimum rate of
interest as declared in the contract when you buy the annuity. However, the interest rate the annuity pays may actually exceed the minimum rate and may last for a certain period of time,
such as one year, after which the rate may change.
Deferred variable annuities also may offer principal
protection through riders attached to the basic annuity (annuity riders typically come with an additional cost). For example, a common
annuity rider restores your annuity's accumulation value to the amount of your
total premiums paid if, after a prescribed number of years, the accumulation
value is less than the premiums you paid (excluding any withdrawals).
Another benefit offered by some deferred annuities is a
death benefit guaranteed* to equal at least your investment in the contract.
Most annuity death benefits provide that if you die prior to converting your
account to a stream of income payments (annuitization), your annuity
beneficiaries will receive an amount equal to your investment in the contract
(less any withdrawals you may have taken) or the accumulation value, whichever
Why an annuity might not be a good idea
Fees: Some deferred annuities charge mortality and
expense fees in addition to other fees that may be greater than fees charged in other
investments. Specifically, deferred annuities may charge fees for a death
benefit, minimum income rider, and principal protection.
Required minimum distributions: As an owner of a
traditional IRA, you are required to take required minimum distributions (RMDs)
beginning at age 70½. Deferred annuities outside of IRAs do not have this
requirement. So buying an annuity within an IRA now adds the RMD requirement to
Surrender charges: Deferred annuities come with
surrender charges, which charge a penalty for taking withdrawals from the
annuity prior to maturity. These surrender charges may make deferred annuities
less liquid than some other types of investments. However, many deferred
annuities waive surrender charges for withdrawals up to a certain amount, such
as 10% of the account value; for RMDs; for withdrawals based on a guaranteed*
minimum withdrawal rider; and if the annuity is annuitized into a stream of
Tax deferral: Deferred annuities offer deferral of
income taxes on gains and earnings of account values within the annuity. IRAs
also offer tax deferral of gains and earnings. So, you are receiving no
additional income tax benefit by investing in a deferred annuity through an
Is an annuity right for you?
Some deferred annuities afford benefits that may not be
available in other types of investments, making annuities an option to consider
for your IRA. However, most of these benefits come at a cost that can reduce
your account value. Before funding your IRA with a deferred annuity, talk to
your financial professional. You'll want to know:
- Does the annuity have surrender charges and if so, how
much are the charges? Is there any amount I can withdraw from the annuity (such as required minimum distributions)
without incurring surrender charges?
- Can the annuity decrease in value? Are there any options
available in the annuity to protect my investment?
- What are the benefit options and what are their costs? Are
there any other fees or charges that apply to the annuity?
- What is the financial strength of the company issuing the
If annuity benefits fit your financial plan, a deferred
annuity may be a good option for your IRA.
Variable annuities are sold by prospectus. Variable
annuities contain fees and charges including, but not limited to, mortality and
expense risk charges, sales and surrender (early withdrawal) charges,
administrative fees, and charges for optional benefits and riders. You should
consider the investment objectives, risk, charges, and expenses carefully
before investing. The prospectus, which contains this and other information
about the variable annuity, can be obtained from the insurance company issuing
the variable annuity or from your financial professional. You should read the
prospectus carefully before you invest.