Which Is Best: an IRA or an Annuity?

Individual retirement accounts and annuities enable you to grow your funds on a tax-deferred basis. Despite the fact that the two investment options benefit from the same tax treatment, there are a number of differences between the two including your investment options and principal protections. Therefore, you should carefully review the pros and cons of each investment before making your choice.


You fund a traditional IRA with pretax earnings while Roth IRAs are funded with taxed earnings. However, income restrictions apply that prevent high earners from investing in Roths, while you cannot always contribute fully to a traditional IRA if you also invest in employer-sponsored retirement accounts. People under the age of 50 can only invest up to $5,000 per year into each type of IRA, while people over 60 can invest no more than $6,000. There are no income restrictions of contribution limits on annuities which makes these investments accessible to those who cannot open IRAs or Roths. You can also start an annuity with pretax or after-tax funds.


IRAs are individually owned, which means you cannot open an account jointly with your spouse or another family member. However, you can you can establish joint annuity contracts and typically you can name anyone that you want as the contract's pay-on-death beneficiary. On an IRA in most states, you must name you spouse as your beneficiary unless your spouse agrees to sign a spousal consent form and allows you to name someone else as the beneficiary.

Investment Options

Annuities are insurance contracts that entitle you to living benefits and provide death benefits to your family in the event that you die before the end of the annuity contract. Annuities are not federally insured, but are insured by state insurance guaranty associations.

You can use IRA funds to buy an annuity and enjoy all of the benefits that annuity contracts offer. However, you can also invest in federally insured deposit accounts, mutual funds, stock, bonds or real estate. When you buy an annuity you invest in one product, whereas you can move funds in your IRA between different investment types as and when you need to.


If you buy a deferred annuity such as a variable or indexed annuity you pay annual fees of 3 or 4 percent plus penalties of up to 8 percent if you withdraw your funds during before the end of the annuity term. Annuity terms last for between four and 25 years.

When you establish an IRA you may have to pay an annual custodian fee of between $25 and $75 dollars to the financial institution holding your account. You can avoid further fees by investing in an IRA deposit account or a no-load mutual fund. If you invest in an IRA annuity you pay the same fees as you would if you bought an annuity with non-IRA funds.