YOU ASK:

IRA vs. annuity?

WE ANSWER:

An IRA or individual retirement account allows you to save up tax-free dollars for your retirement. You can throw in up to $5,000 annually (when you're under 50 years old) or $6,000 annually (for those above 50 years old). Depending on your selected IRA, you can have someone manage the IRA's investments, or you can decide on the investments yourself.

The similarity of an IRA and an annuity is that these allow you to make your money grow tax-free. Once the "accumulation" period is over and the IRA or annuity starts to pay up, then that's the time you'll be taxed.

The difference between an IRA and an annuity is that with an IRA, you have the option of how much of the funds you want to withdraw after the IRA has "matured". With the annuity, payments are more or less steady (or a specific amount, if you choose a fixed annuity).

Now, which is better? Well, let us look at some aspects of these investments:

  • Control of funds. If you're the type who wants to call the shots as to what investments should be made, then you should go with the IRA, which you can set up so that you are the one making the decisions.
  • Variety of investments. With an IRA, you also have more options on where you will be placing your money. Aside from the bond funds or stocks that are traded by annuities, you also can look into a wider range of investments offered by your broker.
  • Security of investment. If you go with an annuity, your principal is protected. Going even further, you can also "protect" your investment earnings by getting a fixed annuity, which guarantees a specific rate of return over a number of years, after which another specific rate of return is guaranteed for the next period. With an IRA, you will have more flexibility and opportunities to make more, but making bad investment decisions will also lead to your losing your money, including the principal.
  • Fees. IRAs are cheaper and can usually have fees amounting to .7% of your investments, compare this to a variable annuity, which can charge up to 2% a year. This fee includes fund management costs and overhead costs, as well as surrender charges and annual mortality charges. A fixed annuity is a bit cheaper, but is usually higher than fees for IRAs. This area is one of the major disadvantages of the annuity. The high fees can limit the growth of your money.
  • Limits on the contributions. As previously mentioned, IRAs have limits on what you can contribute tax-free per year. On the hand, annuities don't have contribution limits - it depends on the annuity you choose.

So which is better? You should weigh these options on your personal circumstances and decide. There are also some who decide to get the best of both works - fully funding their IRA (and 401(k) accounts) and then contributing the rest to an annuity.

Was this question and its answer useful?
Not a bit
  • Currently 4.5/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Very useful
Have a question about insurance? Ask the experts
Share: