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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:
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:
Required minimum distributions
|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|
>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.
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.