What Is the Difference Between an Annuity and an IRA?

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states, including yours. Today’s topic is the difference between an annuity and an IRA. Let’s talk about that.

Types of Annuities

We’re going to start with the annuity types. You’ve got the Multi-Year Guarantee Annuities, Fixed Index Annuities, and Variable Annuities, as well as the account types—IRA, Roth IRA, and non-qualified. We’ll go over all of that in detail. Remember, you can put an annuity inside a Roth IRA, a traditional IRA, and a non-IRA. We call it a non-qualified account. Remember, the guarantees are the same whether it’s a Single Premium Immediate Annuity, Multi-Year Guarantee Annuity, Fixed Index Annuity, Deferred Income Annuity, or Qualified Longevity Annuity Contract (which is used in IRAs). The taxation of it coming out is different, but you can have that in all account types—IRA, Roth IRA, or non-IRA.

Annuity Types Explained

Let’s dive deeper into the annuity types. There’s the Multi-Year Guarantee Annuity (MYGA). That’s the annuity industry’s version of a CD. Then there’s Fixed Index Annuities. That’s a Fixed Annuity, also a CD product, but it has the accumulation value tied to a call option. You need to get my book on that. Go to The Annuity Man, and you can download it for free. Then there’s a Deferred Income Annuity, which is an Immediate Annuity that you can defer as short as 13 months or as long as 40 years. Then, a Qualified Longevity Annuity Contract (QLAC) can be used in a traditional IRA and some employer-sponsored plans. You can use that for future income needs and defer it as far out as age 85 before the income starts, but you don’t have to wait that long. It can begin sooner.

Then there are Variable Annuities. I don’t sell Variable Annuities. I only sell fixed products because you own an annuity for what it will do, not what it might do, and the “will do” is the contractual guarantee. So, Variable Annuities, there’s nothing wrong with them. They have mutual funds inside them, called separate accounts, and they were put on the planet in the 1950s for tax-deferred growth. Finally, the granddaddy of them all, Single Premium Immediate Annuities that were put on the planet in Roman times. Those are, in my opinion, the best annuity for immediate income right now, what I call income now. That’s a Single Premium Immediate Annuity.

Types of IRAs and Annuities

Okay, let’s dig a little deeper into the types of IRAs that you can put an annuity inside of. You might have a traditional IRA that you’ve contributed to over the years. You might have rolled a 401(k) into an IRA, and you can put an annuity inside of that. You might have inherited an IRA, and then there’s the non-taxable Roth IRA.

Alright, I got a call the other day from the infamous Ernie, or Chester, as I normally call him. He calls me all the time on the phone. I use the name Chester because that’s a typical person who calls me from the South, like my Uncle Chester. Chester will call and say something like this: "I just bought an IRA annuity." No, you didn’t, Chester. You bought an annuity inside an IRA, and there’s a difference. Often, when people purchase annuities from, say, bankers—young bankers—I have cowboy boots older than most bankers. I’ve been in the business a long time. There’s a lot of blurring between the lines on the definition of an annuity and the account type. You can have an annuity inside a Roth IRA, a traditional IRA, or a non-IRA, but the annuity itself is separate.

Understanding the Annuity and IRA Relationship

Think about the annuity and IRA conundrum like this: The IRA, Roth IRA, or non-qualified account is the house. The annuity types—the MYGAs, QLACs, DIAs, SPIAs—are the furniture that goes inside. You have the house, which is the account type, and then you have the annuity inside that specific account, whether it's an IRA, non-IRA, or Roth IRA. The guarantees of the annuities are the same, as I told Chester. He didn’t believe me at first, but now he does. It’s just the taxation issues when you take money out. That’s it.

IRA and Annuity Taxation

When you have an annuity of any type inside of an IRA—a traditional IRA, for example—the taxation is going to be the same. You’ve been deferring taxes the whole time with the IRA. Think of the IRS tapping you on the shoulder, so when you take money out, it will be taxed at ordinary income rates. A common question I get all the time is, "Stan, which annuity type is best for an IRA?" There’s no good answer, just bad sales pitches. It really comes down to your specific situation. Remember the two questions I always ask: What do you want the money to contractually do? And when do you want those contractual guarantees to start? From there, I can narrow it down to whether you need an annuity and, if you do, which type will provide the highest contractual guarantee for your situation.

Choosing the Right Annuity and Account Type

I get this question all the time: People are looking at annuities. We’ve gone through the process of asking the two questions: What do you want the money to contractually do? When do you want those contractual guarantees to start? We’ve developed the correct type of annuity that provides the highest contractual guarantees for your situation. The last part of the puzzle is deciding what account type it should go in. “Stan, I’ve got a Roth IRA. Stan, I’ve got a traditional IRA or 401(k), and I also have just cash. I have a non-qualified account.” These are things that we need to talk about. The annuity world has no perfect answers, just bad sales pitches. Never forget that, but we’ll come up with a plan based on your specific situation, whether that annuity guarantee you're looking at—whether it’s principal protection or income for life—fits best for you.

Conclusion and Next Steps

It might fit best in your Roth IRA, traditional IRA, or non-IRA, but we need to discuss that. By the way, if anyone ever says, “You never put an annuity in a traditional IRA,” that’s garbage. Why? Because the guarantees in an annuity work inside of a traditional IRA, and it might make sense for you to do that. So, don’t listen to all the noise. Listen to Stan The Annuity Man. That’s the reason we need to talk. You can go to my site at The Annuity Man and set that appointment, and we’ll have that conversation.

Thanks for joining me today. I encourage you to go to my site, The Annuity Man, to run your own quotes. You can also get my books, which you can download for free without obligation, and schedule a call with us. We will listen to you, put together a customized plan, and even tell you if you don’t need an annuity.