Annuities are setting sales records, thanks to higher interest rates, lower stock prices, and aging Baby Boomers. It’s been years since annuities were able to offer payouts comparable to today’s, and the annuities protect your principal and guarantee lifetime income.
Since many people have significant portions of their retirement savings in IRAs or 401(k)s, they frequently ask whether their IRA or other qualified retirement account may own annuities.
The answer is “yes.” The tax code allows IRAs, both traditional and Roth versions, to own annuities. The same goes for 401(k)s.
IRAs aren’t allowed to own life insurance, and that causes some people to mistakenly think IRAs can’t own any insurance products, including annuities.
Some financial advisors say that while annuities are permissible for IRAs, owning an annuity in an IRA isn’t a good idea. But I think that depends on the reason you’re buying an annuity.
Fixed deferred annuities provide tax-deferred compounding of income. If tax deferral of interest income is the main goal, there’s no reason to own an annuity through a traditional IRA. The annuity already offers tax deferral. (A Roth IRA makes the income tax free, an even better deal than tax deferral.)
Even so, that doesn’t make it a bad idea to own a deferred annuity in a traditional IRA. When you’re buying an annuity primarily for the guaranteed, safe yield and protection of your principal, it’s fine to own it through an IRA or 401(k) if that’s where your cash is located. When there’s a choice, it’s best to own the deferred annuity outside an IRA and use the IRA to invest in assets that don’t have tax advantages.
Suppose you’re in or near the retirement years and are looking for the guaranteed lifetime income provided through a single premium immediate annuity or a deferred income annuity.
The tax code allows you to own that annuity through either an IRA or a taxable account. There’s no reason not ot own the annuity through a traditional IRA or a 401(k). In fact, in recent years Congress passed legislation designed to encourage employers to offer 401(k) participants options to shift their 401(k) balances into annuities with guaranteed lifetime income.
There’s even a special type of annuity created exclusively for IRAs: the qualified longevity annuity contract (QLAC).
While you are allowed to buy an annuity in a Roth IRA, it’s probably not the best use of the Roth IRA. Since earnings in a Roth IRA compound tax free and eventually are distributed tax free, it’s best to invest the Roth IRA in growth assets. For the same reason, a Roth IRA is not the preferred vehicle to own other safe investments such as bonds, CDs, and money market funds.
Some people don’t have an option. Most of their money is in Roth IRAs and they want some guaranteed lifetime income. But if you have a choice, it’s best to own an annuity outside of a Roth IRA.
The tax code allows you to own annuities in your IRAs. Whether you should buy an annuity through the IRA or a taxable account depends on the details of your situation and your goals. But the option is available and should be considered when making your plans.