When investing for retirement, there can be a plethora of different strategies. Certainly, one of the best ways of maximizing your retirement savings – and your retirement income – is to minimize your taxes.
Both annuities and IRAs (Individual Retirement Accounts) have been known for their tax advantages when it comes to retirement savings. Yet, just because they both have some nice tax-related features, it may or may not mean that these two financial vehicles should be combined.
How an IRA Account Works
An IRA is a type of retirement account that allows investors to set aside a certain amount of funds each year for the future. For many years, there was just one type of Individual Retirement Account. Today, however, there are two primary types – the Traditional and the Roth.
With a Traditional IRA, investors can contribute pre-tax dollars into the account – up to an annual maximum amount of contribution. The total amount that can be deducted will depend on how much you earn, as well as whether or not you participate in an employer-sponsored retirement plan.
The funds that are inside of a Traditional IRA account are allowed to grow on a tax-deferred basis, which means that none of the investment gains in these accounts will be taxed until the time they are withdrawn. This can essentially allow the funds to grow and compound a great deal over time – especially in comparison to a taxable investment account.
When the money is withdrawn, it will then be taxed at the investor’s ordinary income tax rate. However, in many instances, because the account holder will be in retirement, his or her tax rate may be at a lower amount than it was during their working years, therefore effectively reducing the amount of tax that will need to be paid.
A Roth IRA is funded with funds that have already been taxed. Those who earn above certain income limits may not be able to contribute to a Roth IRA. For instance, in 2016, single tax filers who earn an adjusted gross income of $116,000 and over may not contribute, and married filers who earn more than $184,000 will also be excluded from participating.
There are also no taxes due to the growth of the funds within a Roth IRA – however, when it comes time to withdraw the money from these types of accounts, the funds can come out tax-free.
Unlike with a Traditional IRA account, however, there are no Required Minimum Distribution (RMD) rules with a Roth IRA account. Therefore, money can be left inside of a Roth IRA account without having to be withdrawn well past the account owner turning age 70 1/2. Also, deposits can continue being made, regardless of how old the account owner is.
Some IRA Limitations – Why Annuities Should Not Go Inside of IRAs
While an IRA can have may nice tax advantages – including tax deferral of investment gains – the truth is, so can annuities. So, when it comes to holding off on paying taxes on what you’re earning on your funds, putting an annuity account inside of an IRA isn’t necessarily going to bring about a great deal of advantages.
Some financial advisors refer to placing an annuity inside of an IRA account as wearing a raincoat inside – in other words; it isn’t going to provide an investor with any additional benefits, even in the area of tax-deferred growth of their funds.
In addition to that, IRA accounts will even have some limitations when it comes to how much you can deposit every year. For example, in 2016, for investors who are age 49 and younger, the maximum amount that can be deposited into an IRA is $5,500. If you’re age 50 or over, you can deposit an additional $1,000 that is known as a “catch-up” contribution – making your total for the year $6,500. For those who are truly trying to maximize their retirement savings, though, this still may not be enough to give you the boost that you need – even with the deferred tax growth that is allowed within these accounts.
An annuity, on the other hand, will not have the annual contribution maximums. Therefore, regardless of your age, you can typically contribute as much as you would like into these types of vehicles.
In addition, there can also be other types of limitations when you own an IRA account. For example, if you’re the holder of a Traditional IRA, you will be required to begin taking, at least, some amount of minimum withdrawals from the account when you reach the age of 70 1/2.
This is what’s referred to as the Required Minimum Distribution, or RMD, rules. If you don’t take out your required minimum amount of withdrawal, you can be penalized by the IRS (Internal Revenue Service) for not doing so.
Unfortunately, the RMD rules can hinder your investments in a couple of different ways – especially if you do not need the income yet from your Traditional IRA account. First, it hinders you because it removes a certain amount of money from the IRA – thus, taking away funds that could be receiving tax-deferred growth. Also, at the time you reach age 70 1/2, you are no longer able to make any additional contributions into your Traditional IRA account.
Reversing It – Putting Your IRA Funds Inside of an Annuity
While putting an annuity into an IRA account is not typically recommended for many reasons, there can be a number of reasons for “rolling” your IRA funds into an annuity. (This also goes for rolling other qualified funds into an annuity, such as those from an employer-sponsored 401(k) plan).
In fact, when you are ready to retire, it is possible to roll many types of retirement savings into an immediate annuity so that you can begin to generate the income that you need – including savings from your IRA, 401(k), or 401(b) plan. And, you can roll these funds over to an annuity tax-free.
By rolling these funds over into an immediate annuity, you will be able to start receiving retirement income either immediately – or very soon after – you make your deposit. The amount of the income that you receive will be based on a number of different factors. These include the following:
- The amount of your deposit
- Your current age
- The interest rate on the annuity
- The income payout option that you choose
There are typically several different income payout options that you can choose on an annuity. These will often consist of a period certain option where you can obtain income for a certain number of years such as ten, twenty, or twenty-five. The annuity will continue to pay out income for the period of time that you select. If you happen to pass away during that period, the annuity will still continue to pay out the income, provided that you have named a beneficiary, until the set period of time has elapsed.
You may alternatively opt to receive a guaranteed lifetime income option from the annuity. With this option, the annuity will pay out a stream of income to you – as well as to your spouse or another recipient, if you so choose – for the remainder of your lifetime, regardless of how long you live.
By choosing the annuity’s lifetime income option, you can alleviate the fear of outliving your retirement savings – which is the number one fear on the minds of so many retirees today due to our longer life expectancies. With this income option, your payments will come in, regardless of what is happening with the stock market – or even in the economy overall.
If you have rolled your Traditional IRA or 401(k) plan funds over into an annuity, then it is likely that your income payment will be 100% taxable as income to you. This is because it is probable that none of the funds within your Traditional IRA or 401(k) plan had been previously taxed to you in the past.
How and Where to Obtain the Very Best Rates on Annuities for Retirement
When you’re looking for the very best rates on annuities for your retirement, the wisest shopping tips can include going with either an agency or a company that has access to multiple annuity carriers. This is so that you will be able to view, in an unbiased manner, the many different options that you have available to you – and from there you will be able to determine which will be the best for you and your specific situation.
If you are ready to move forward, we can help. We work with many of the top annuity carriers in the marketplace today, and we can assist you with obtaining all of the important details that you will require for making a purchase decision. We can also work with you on comparing rates and other benefits and features of the various annuities that we have to offer. When you are ready to proceeds, all you need to do is just simply take a few moments to fill out the quote form on this page.
Should you find that you still have any questions regarding whether you should place an annuity inside of an IRA account – or even if you just simply have a question about an annuity in general – please feel free to contact us directly. Our experts can work with you in obtaining any of the answers that you require. We can be reached via phone, toll-free, by dialing 800-376-0824.
We understand that planning for retirement can require a great deal of preparation. There are many pieces of the puzzle to put in place – and you want to ensure that you will have all of the income that you need in order to live the lifestyle that you desire. That’s where we can help. We are experts in the area of retirement income annuities – and we know the many carriers that we work with regarding how they may be able to meet your needs. So, contact us today – we’re here to help.