How to Buy an Annuity: IRA, Non-IRA, Roth-IRA
This topic today is part of the series that we're doing on how to buy an annuity. No, this isn't some veiled sales pitch, but yes, I do sell annuities. Yes, I would love to speak with you to see if an annuity type is right for your specific situation to solve a specific goal, but our How to Buy Annuity series covers specific topics. Today's topic is about annuities inside of an IRA, a non-IRA, and a Roth IRA. So we're going to go through each type, how it works and why you might consider putting an Annuity type inside of those structures.
The first thing that we have to cover is all of the advisors, master of the universe, and journalists and all these ads you might see out there that's like," Never buy an annuity and never put an annuity inside of an IRA. Never." That's so uninformed and stupid, for lack of a better phrase.
So why would you put an annuity inside of an IRA? You put it in there for the contractual guarantee.
The funny part about people saying, "Well, never put an annuity inside of an IRA Stan,” is because an annuity type called a qualified longevity annuity contract was designed and introduced by the IRS and the Department of the Treasury for use inside traditional IRA-type accounts. Talking about annuity types inside of IRAs, first of all, you just can't say the word annuity, and it's all-encompassing. Annuities have many different types. There are single premium immediate annuities, deferred income annuities, qualified longevity annuity contracts, fixed index annuities, and variable annuities that we don't sell.
There's a lot of different types, a lot of different strategies, a lot of different ways to use them. When I'm talking about all of these account types, I'm talking about all of these annuity types and how they fit. Inside of an IRA, let's just say your traditional IRA, you can have an immediate annuity or deferred income annuity, a multi-year guaranteed annuity, and index annuity, all inside of an IRA.
The difference is when you take money out of an IRA, you take it out, and whatever you take out is taxed at ordinary income levels. Same thing with annuities. So why would you put an annuity inside of an IRA? You put it in there for the contractual guarantee. You own an annuity for what it will do, not what it might do®. They will do® the contractual guarantees, and they might do the hypothetical, theoretical backtested number nonsense, agent hopeful return scenarios.
You never buy an annuity for market growth, in my opinion. Annuities are transfer risk contracts. With the inside of an IRA, you're transferring the risks. With an Immediate annuity, you can use it for lifetime income to start immediately. Multi-year guarantee annuities inside of there for guaranteed interest rate like a CD indexed annuity CD type returns inside an IRA. Deferred income annuities you can have inside a traditional IRA, but the income can start up to age 72. Past age 72, if you want income to start, that's a qualified longevity annuity contract. I've just debunked all the people out there that say," Never put an annuity inside of an IRA Stan." That's dumb. It's stupid. It's uninformed misinformation, and these people need to stop talking about what they don't know.
Let's talk about non-qualified, non-IRA checking account type money. I am checking savings account type money that's already been taxed. Can you buy annuities using that? Absolutely. You don't have to, but you can. With single premium, immediate annuities, deferred income annuities, those are lifetime income products. The lifetime income is a combination of return of principal plus interest. In a non-IRA account, you're not going to pay taxes on the return of principal; you will pay taxes on the interest.
Now, you can also buy index annuities and multi-year guaranteed annuities in non-IRA accounts. The interest rate growth with those products is going to grow tax-deferred in a non-IRA account. Once you decide to take money out, it last-in, first-out accounting, LIFO gains first and is taxed at ordinary income levels. That's for the non-qualified non-IRA account.
Qualified longevity annuity contracts are used just inside of IRAs. Can income riders attached to index annuities be used in non-qualified? Absolutely. You can get income from that non-IRA asset, and that income coming out when you start taking it is once again, last-in, first-out gains first. You’re going to pay at ordinary income levels for the money that's coming out of that income stream.
We've covered IRA, we’ve covered non-IRA, so let’s talk about Roth IRA. If you have a large enough portfolio and IRAs and non-IRAs, and then you've converted some money to the Roth. In my opinion, that Roth IRA should be used for real market growth, and anytime you want real market growth, in my opinion, you should never, ever buy annuities of any type. Period. That's just my opinion. I know you're going to hear differently out in the hinterlands of the annuity world, but I'm just telling you that's my opinion. It’s a very experienced opinion and a factual opinion.
However, let's just say, "You know, Stan, we still want to use the annuities inside of a Roth." Well, the Roth isn't money that has already been taxed, and unless our friends in DC changed the rules, they could, I guess, and you might be grandfathered in if they do, you could put everything by the qualified longevity annuity contract inside of a Roth IRA. You can, and the money coming out will be tax-free, which is a good thing.
I do have clients that say, "You know what, we want a lifetime income stream. We want it to start right now." So that's an immediate annuity. Again, my two questions are, what do you want the money to do contractually, and when do you want those contractual guarantees to start? That's what I use to determine what type of annuity will provide the highest contractual guarantee. In this case, an immediate annuity, they bought it with Roth IRA money, and that immediate annuity income coming to them every month is tax-free. Pretty good deal. Roth IRAs, IRAs, non-IRAs, it doesn't matter where you place that annuity,
Qualified longevity annuity contracts are the only ones with the rules that are just the traditional IRA or some retirement account 401K type areas that allow those in the vast majority of traditional IRAs. Still, you really can use annuities in any account type. The question is, why? The question is, should you? Then if we decide that it makes sense, the difference is just the taxation of the money coming out when you take money out.
I got a call the other day; it’s a great story. This guy calls me at 1-800-509-6473. I typically answer my phones. He said the following, "I'm thinking about buying a lifetime income stream," He told me all the parameters when he wanted to start," but I'm not sure which account type to use." Now, do I give investment advice with anything other than annuities? No, I'm an Annuity specialist. Regardless, the conversation we had was fantastic because I asked him broad questions about his overall portfolio. "How much is in your traditional IRA? Do you have a Roth IRA? How much is in your cash checking account type positions?" Then from there, we made an excellent decision on where the contractual annuity guarantees should go for him, and it wasn't what he was thinking. In my decades of experience, I've been to that rodeo. I gave him my opinion. He was thrilled with what we came up with from a contractually guaranteed standpoint, and he was pleased because I pointed him to the proper account type to use.
That's a great story, and it's probably your story as well because if you're considering annuity of any type, and remember there are different types of annuities, you need to make sure you're putting that annuity type in the right account. The bottom line is, can you buy an annuity inside of an IRA or Roth IRA, or a non-IRA? The answer is yes. The real question is, should you?
Never forget to live in reality, not the dream®, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.