Annuity vs. IRA: Which is Better for Retirement?

Which is the right retirement saving plan? It is common to find people who are unable to differentiate between annuities and IRAs when planning for retirement. If you are one of them, worry no more because this article details what these two terms mean and how they differ. 



Simply, IRA is an individual retirement account. There are two basic forms of IRA, Roth and traditional, which vary in different ways. One notable difference is when you pay taxes. With a Roth IRA, you pay taxes now and withdrawal your money tax-free. With a traditional account, you get a tax break now and pay taxes when you make withdrawals. Your benefit from tax-deferred growth for as long as your money stays in your account.

Whether you choose Roth IRA or traditional IRA, it is worth to understand the following about IRAs:

  • An IRA is just an account, not an investment. With this account, you can hold investments such as EFTs, stocks, mutual funds, bonds, and more. As mentioned above, an IRA in an individual account- for one person only. This means your spouse and other family members also need to open their own accounts. No sharing a single account.
  • There are annual contribution limits. As of 2019, the limit was $6000. Older people, 50 years and above, are allowed to save an extra $1000 every year. That brings the 2019 total to $7,000.
  • Your income contributes to your eligibility. Basically, the more you earn, the less you qualify to use an IRA. In 2019, contribution limits started to decrease when you make $122,000 annually. If you make $137,000 or more, you cannot contribute to an IRA.
  • Nontraditional investments like jewelry, private business investment, and real estate might be available in the IRA but come with extra complications. We recommend consulting an expert about these options before reaching a decision.
  • The performance of the account depends on how well the investments inside the account perform. Your money is not shielded from market risks.
  • Early withdrawals, those made before age 59.5, are often subject to a 10% penalty plus tax on the amount you take out. With traditional IRA, you must start taking distributions once you turn 70.5; otherwise, you will be slapped with a whopping 50% on the amount you fail to withdraw. The payouts you will get will depend on your account balance and your life expectancy at that age.   



With an annuity, you receive guaranteed income once you retire. You can get your income either on a monthly, quarterly, annual, or lump sum basis. Annuities guarantee steady income because they are insurance products, unlike IRAs which are investment products. Keep in mind that in case of an economic downturn, investment accounts feel the pain more than retirement accounts consisting of annuities.

Here are a few things you need to remember about annuities:

  • They can be jointly owned.
  • Some annuities start payments with a year.
  • Except for variable and index annuities, annuity returns are not affected by market conditions.
  • There are a variety of annuity options to consider based on your income, family size, and other factors.
  • Annuities come with tax incentives and penalties for early withdrawals
  • Annuities usually come with higher fees and expenses than IRA investment options.
  • Annuities may be protected from creditors or bankruptcy in some states, just like IRAs or other retirement accounts.

Here is a table that further the difference and similarities between the two.

Required minimum distributions

Annuity  Traditional IRA
Annual contribution limit No annual limit $5,500 if you’re under 50; $6,500 if you’re 50 or older
Earliest withdrawal age to avoid penalties 59 ½ (exceptions apply) 59 ½ (exceptions apply)
No required minimum distributions Starting at 70 1/2
Tax treatment of contributions Contributions are made with after-tax dollars Contributions are made with pre-tax dollars
Taxes on withdrawals Withdrawals are taxable initially, but eventually become tax-free Withdrawals are taxed as ordinary income

How to open an annuity and IRA

>Since annuities are insurance products, you purchase them from brokers or insurance companies. You can also buy them from banks, financial advisors, brokerage firms, independent insurance agents, and broker-dealers.

Most brokerage firms also offer IRA account variation. This makes it easier for you to decide where to put your money. With most firms offering the help of financial advisors, you can be sure to make a sound decision. Robo Advisors is a good example of professionals you can consult at this time.

Which is right for you?

Both options are great. Now, whether to choose an annuity or IRA depend on your retirement goal. If you want guaranteed income in retirement, choose an annuity. If your focus is more on the flexibility in selecting investments, an IRA will not disappoint you. You may also want to consider tax incentives, membership, and security when reaching a decision. Basically, there are several things to put into considerations before choosing the right option. Feel free even to consult financial advisors if you find yourself in a bind.

As you can see, it is crucial to understand the difference between the two options when planning for your retirement. Once you understand how these two retirement plans work, it will be easier to make a sound decision. What is more crucial is working to develop your retirement savings plan as early as possible. Do so will help ensure that you have enough money to live off once you retire. 

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