What Is the Difference Between an Annuity and an IRA?

Annuities and IRAs provide tax-deferred growth.

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Individual Retirement Arrangements and annuities both provide you with the chance to grow your money on a tax-deferred basis. In fact, these investment types are not mutually exclusive since you can buy an annuity with IRA funds. However, despite the similarities and use of annuities in IRA plans, the difference between an annuity and an IRA is significant.

Annuity vs. IRA: How IRAs Work

IRAs contain sums of money that you have kept separate from your taxable accounts. You can contribute money to a traditional IRA on a pretax basis, and no taxes are assessed until you make withdrawals. You can use IRA money to buy a variety of investments including stocks, bonds, certificates of deposits, annuities and mutual funds.

IRAs are subject to annual contribution limits, which means you can only contribute so much per year into your IRA. Additionally, Roth IRAs are after-tax IRA accounts that are subject to income restrictions. Annuities are not subject to income restrictions unless you designate your annuity as an IRA account, in which case regular IRA rules apply.

Withdrawals from IRAs are fully taxable. You also have to pay a 10 percent tax penalty on withdrawals made prior to the age of 59 1/2 , although some exceptions exist. For example, if you use the money to buy a first time home, there is no penalty.

Annuity vs. IRA: How Annuities Work

In contrast to IRAs, annuities are life insurance products designed to provide you with an income stream. The income stream begins within a short space of time with an immediate annuity, while deferred annuities provide you with income at some point in the future. Deferred annuities may contain sub-accounts holding mutual funds or income generating investments like bonds or CDs. Some annuities also include death benefits that provide your beneficiaries with a payout if you die before the term ends. Additionally, annuities, unlike IRAs, can have more than one owner. You can also roll your IRA into the annuity; an IRA annuity rollover is tax free.

You can buy annuities with money held in your taxable accounts, and these are referred to as non-qualified annuities since the money was not previously held in a tax-qualified or tax-deferred account. However, non-qualified annuities grow tax-deferred in the same way as IRAs. You can greatly reduce your tax liability by moving taxable assets in non-qualified annuity contracts.

The 10 percent tax penalty assessed on early withdrawals from IRAs also applies to withdrawals made from annuities prior to the age of 59 1/2. However, on a non-qualified annuity yo,u only have to pay taxes and penalties on your earnings rather than the whole amount of the withdrawal.


When you make a partial withdrawal from an after-tax Roth IRA, taxes are assessed based on the first-in-last-out rule. This means you get your non-taxable principal back before you get access to your taxable earnings. If you keep funds in your Roth for five years and until you reach the age of 59 1/2, you do not have to pay taxes or penalties on your earnings or principal. In contrast, withdrawals from deferred annuities are taxed using the last-in-first-out method. This means you have to withdraw and pay taxes on all of your earnings before you get access to your non-taxable return of principal.

Protection for IRA and Annuity Funds

If you invest IRA funds in a CD or bank account, your funds are insured by the Federal Deposit Insurance Corporation up to $250,000. Most brokerage firms belong to the Securities Investor Protection Corporation, and this entity insures most types of securities in brokerage IRAs up to $500,000 per account owner. The SPIC covers losses tied to your broker going bankrupt rather than securities losing value. Annuities are not federally insured and the SIPC does not insure fixed annuities held inside brokerage IRA or non-IRA accounts. State regulated guarantee funds do insure annuities but coverage levels vary between states.