When considering where to put your money for retirement, you may have to choose between an IRA and an annuity. These financial “vehicles” are set up to ensure guaranteed income down the road that can be used to sustain a lifestyle you’re accustomed to. 

The good news is that both vehicles let you save money toward retirement and have different tax advantages, but they are not quite the same. You must weigh early withdrawal penalties and other ins and outs before deciding which one to choose.  

What Is An Annuity? 

When you sign up for an annuity, you are making a contract with a life insurance company to provide you with guaranteed income upon retirement, often for life. You can usually buy an annuity in one lump sum or pay for it over time. 

Fixed 

If you choose a fixed annuity, you make premium payments monthly while the insurance company establishes the percentage rate at which your account will grow yearly. The growth will never change and is “fixed” at this interest rate for life, which means you can count on exactly how much you will receive each month. 

Variable

With a variable annuity, the insurance company places a tax-deferred investment vehicle into accounts like mutual funds. Any future income derived from a variable annuity is not fixed and can go up or down based on the mutual fund’s performance. This option carries more risk but also higher financial rewards. 

Equity Indexed

An equity-indexed annuity is a combination of both fixed and variable, which ties its interest rate to the stock market index’s performance. If the market has an up year, you’ll receive additional interest toward the value of the contract. If the market has a negative year, no index interest is added, though your annuity won’t lose any value. 

Key Benefits of Annuities 

First and foremost, the biggest key benefit of any annuity is that you receive guaranteed income for a fixed term or possibly for life. This depends on the contract you set up with the life insurance company, but it’s peace of mind that money will arrive every month. 

You also benefit from being backed by the insurance company, which assumes the risk for your investment. As most insurance companies are too big to fail, you also have this peace of mind while retired. In addition, the idea that any growth you receive on certain types of annuities before retirement is tax-deferred means you won’t pay any taxes until you start withdrawing the funds. 

Last but not least, having the option to choose between different types of annuities means you can find the best choice for you. You can select the type of annuity you want and work with a qualified financial advisor to decide based on your needs. 

Drawbacks of Annuities 

One of the most significant drawbacks of an annuity is that you are locked in for life. After you make a purchase, you typically have no more than 30 days to cancel and get your money back. When this period expires, hefty tax penalties exist for withdrawing money early. 

While an annuity can offer guaranteed income and security, it likely won’t grow as much as money invested in more flexible account types. In other words, you’ll have guaranteed income, but you can potentially earn more with a different investment. 

Several fees are associated with managing an annuity, especially variable annuities, with an annual maintenance charge. You must also consider a transfer fee if you want to make any investment changes and the investment management fee you pay the insurance company. 

What Is An IRA? 

An IRA is a flexible type of account that allows you to invest and save for your future. You can open an IRA at any point if you have income. 

Traditional IRA

With a traditional IRA, you can deduct any contributions from your taxable income, so there are some immediate tax benefits. Unlike a 401(k), you typically can decide where your money is invested with an IRA, which could mean stocks, ETFs, or mutual funds. It’s important to know that you can only start making withdrawals when you turn 59.5 years of age, which are then taxed as regular income. 

Roth IRA

If you opt for a Roth IRA, any withdrawals you make will be tax-free after you turn 59.5 years of age. This is the biggest reason people choose a Roth IRA, but you also don’t receive any tax breaks on contributions made with after-tax dollars. Unlike a traditional IRA, which requires you to withdraw at 73, a Roth IRA has no such guidelines. 

Key Benefits Of An IRA

When you select an IRA for your retirement accounts, you can spread this money into various investment types. This means diversifying your assets and optimizing your returns while managing your risk tolerance. In other words, you have far more flexibility with how you will earn money than an annuity, which is far more limited. 

You can also select which tax implications you are most comfortable with. Would you prefer to pay taxes now or later when you are retired? Having the option is something you should discuss with a qualified financial advisor, but it’s a choice people need to make. 

Unlike an annuity with significant early withdrawal penalties, you can borrow money against an IRA if you need it for emergencies or to help purchase a home. There are sometimes no penalties for borrowing against an IRA, a significant advantage of this retirement financial vehicle. 

Drawbacks of An IRA

There is no question that the biggest drawback of an IRA is that you have a ceiling on the contributions you can make in any given year. In 2024, this number was $6,500, which jumped to $7,000 in 2025. You have a “catch-up” amount if you are over 50, but it’s only good for an extra $1,000 in contributions. 

The biggest red flag with any IRA is that you are subject to market performance. During periods of heavy market volatility, you will find that an IRA is far riskier than an annuity. Additionally, an IRA won’t guarantee any income like an annuity. Still, it does come with the upside of more growth potential, so there is a big question of which vehicle you are more comfortable with. 

Long-Term Retirement Strategy 

With an annuity and an IRA both offering a long-term strategy for retirement savings, the potential for tax benefits, and different risk tolerance levels, you certainly have a choice. In the case of an annuity, you may have to be comfortable putting forth a significant investment to guarantee income. 

In the case of an IRA, it’s less of an upfront investment but comes with more upside regarding earning potential, so the benefits are there. However, an IRA is also subject to market volatility, so you can make money as easily as you can lose it, which gives you something additional to consider. 

Anyone who would prefer a steady and guaranteed income stream while retired can easily choose an annuity. However, if you can stomach more risk and potential upside, choosing the IRA path will be best for you. 

The IRA option also enables some flexibility with borrowing, which might be helpful if you want to make a potential house move or help children and or grandchildren with education costs. 

 

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