An individual retirement account is type of tax-advantaged financial plan that holds underlying investments you manage yourself. You can put IRA money into common investments like stocks, mutual funds or savings accounts, but you can also use an IRA to hold complex financial products like annuities. Annuities don't have contribution limits themselves, but when you hold an annuity within an IRA, you're subject to the normal contribution limits that apply to IRAs.
Traditional and Roth IRAs
IRAs that you open and manage yourself come in two basic flavors: traditional IRAs and Roth IRAs. Traditional IRAs let you deduct contributions if you meet certain employment and income requirements, while Roth IRA contributions aren't tax deductible, but you typically don't have to pay income tax on withdrawals. Both traditional and Roth IRAs are subject to a $5,000 annual contribution limit and offer "catch-up contributions" of $1,000 if you're age 50 or older. This means you can contribute up to $5,000 a year to an IRA annuity or $6,000 if you're over 49.
A SIMPLE IRA is a third type of IRA that employers can offer as a job benefit, similar to a 401(k) plan. Employee contributions to a SIMPLE IRA are limited to $11,500 a year with $2,500 catch-up contributions for those age 50 or older. Employers are also required to contribute 2 percent of your annual compensation to a SIMPLE IRA on your behalf or match your contributions up to 3 percent of your annual compensation.
IRA contribution limits can change over time, which may increase the amount you can contribute to an annuity held within an IRA from year to year. Prices of goods and services tend to increase or inflate, which reduce the value of currency. The government periodically adjusts retirement account contribution limits upward to account for such increases in the cost of living. For the 2013 tax year, IRA contribution limits are set to increase to $5,500 for traditional and Roth IRAs, and $12,000 for SIMPLE IRAs.
While it is possible to hold an annuity within an IRA, it's usually not a good idea. One of the main benefits of an annuity is that the money you contribute grows on a tax-deferred basis until you start receiving income payments from the annuity or withdraw funds during retirement. IRAs already offer tax deferral, so you gain no additional tax benefit by putting IRA funds into an annuity.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.