Savings: Annuities Vs. IRAs

by Jackie Lohrey, studioD

Good financial planning is vital to "buying" a secure retirement. Because you can expect to live an average of 20 years after you retire , says the U.S. Department of Labor, and need 70 percent to 90 percent of your preretirement income to fund those years, the sooner you start planning the better. As you sort through, research and compare retirement savings options, annuities and IRAs are likely to be on your list. Although each has characteristics that make them significantly different, neither is "better" than the other and you can make both work to your advantage in creating a sound retirement plan.


Annuities and IRAs differ significantly with regard to structure and funding. First, an annuity is a contract you purchase from a life insurance company; an IRA is a type of trust account you set up at a bank or other financial institution. Think of an annuity as income insurance or a life insurance policy in reverse. Although there are no limits to how much you can contribute, funding occurs either in a lump sum or with set monthly premium payments. With an IRA, the contributions you make are voluntary and there is a limit to how much you can contribute each year. IRS regulations for 2013 set the limit at $5,500 to $6,500 per year depending on your age.

Maintenance Fees and Taxes

Annuities include insurance charges and investment-management fees that make them generally more expensive than IRAs. In addition, it can be difficult to assess these charges because fixed annuities build charges into the payout amount; a variable annuity, however, will list charges separately. Annuities and traditional IRAs offer tax-deferred benefits, and although contributions you make to a Roth IRA are subject to income tax in the year you contribute, distributions are tax-free.


After the age of 59 ½, IRAs and annuities allow you to start withdrawing money and require you to do so by the age of 70 ½. When the distribution period starts, annuities pay out a set amount for a specific time period, such as for the next 20 years or until your lifetime ends. In this way, annuities supply guaranteed income for life. In contrast, an IRA allows you greater leeway when withdrawing funds. As long as you meet the minimum distribution requirement you can withdraw funds according to an amount and schedule you set. The danger with this option is that you risk depleting the account if you do not manage funds correctly.


Consider a strategy that allows you to take advantage of the flexibility IRAs offer as well as the income insurance benefits that annuities provide. Start by creating a realistic retirement budget and then use it to establish a minimum yearly income requirement. Ensure you will have the financial resources to meet minimum requirements by purchasing an annuity and setting a monthly distribution that equals this amount. Leave the remainder of your money in an IRA to manage on your own. This creates the flexibility you may need to meet unexpected expenses or take advantage of opportunities outside the realm of normal living expenses.

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About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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