The Difference Between Annuities & IRA Annuities

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If you have looked into annuity investments, you might have heard of IRA annuities in addition to traditional annuities. Although traditional annuities and individual retirement account annuities are both typically used for saving for retirement, a few minor differences set the two apart.

Annuity Basics

An annuity is a type of investment that pays you over time. Annuity products usually are offered through insurance providers, but they also might be available through an employer's retirement plan, according to the investment website Personal Dividends. An annuity allows you to make one lump-sum investment, or smaller investments over time. Your investment dollars are invested in stocks and bonds to generate income. Once your annuity contract allows, you can receive payments on a monthly, quarterly or annual basis.

IRA Annuities

You can establish an IRA annuity by rolling over funds from an IRA, a 401(k) or 403(b) plan. This type of rollover does not incur any distribution taxes or withdrawal penalties, providing it is properly handled as a direct transfer from the IRA custodian to the annuity manager, according to Immediate Annuities, an annuity information website. IRA annuities might also be available through your employer's retirement savings plan. Annuities offered through an employer are known as qualified annuities.

Tax Differences

A traditional annuity and an IRA annuity both allow for tax-deferred growth until you being receiving distribution payments. However, one of the main differences concerns your ability to invest pretax dollars. According to investment company Morgan Stanley Smith Barney, the Internal Revenue Service allows you to invest money in a traditional IRA and deduct those contributions from your taxes, providing you are not actively participating in an employer-sponsored retirement plan.

Most private annuities are not qualified as tax-deferred retirement savings plans. Contributions made to an annuity are typically made with after-tax dollars and are not eligible for a tax deduction, unless the contributions are made to a qualified annuity through an employer.

Additional Differences

Other differences between annuities and IRA annuities relate to the laws governing IRA accounts. For example, you could face restrictions as to when you may take disbursement of the funds from an IRA annuity, and on how much of a disbursement you must take.


About the Author

Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.

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