Should You Set Up an Annuity or an IRA?

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Written By Juliet D'cruz

There are many choices you can make when it comes to planning for your retirement. The right retirement plan helps you to save the most money and be prepared when it is time to reach retirement age. The earlier you start, the easier it is to save that money too. While there are a lot of great retirement plans to help you prepare, two options you can choose are the IRA and an annuity. 

The IRA and the annuity can provide you with a tax-advantaged way to save for retirement. But they are two distinct accounts; you need to understand how both work. One big difference is that the annuity is an asset. At the same time, the IRA is a vehicle to help hold financial assets. 

Do you need help determining which of these two plans is right for you? Let’s explore the IRA and an annuity to see which one you should use for your retirement goals. 

What are Annuities?

One retirement option you can choose is an annuity. While this may not be one of the IRA or 401(k) plans you are familiar with, it is still an excellent choice to help you prepare for retirement. Annuities, like a guaranteed income annuity, will be insurance products that provide you a source of income during your retirement. Your annuity will make periodic payments for a certain amount of time or until a certain event occurs. Money that you invest into the annuity will grow tax-deferred until you withdraw it. 

Unlike the IRA, which can often have one owner on it, you can jointly own an IRA. There is no income limit for annuities, so you can still invest in this account if you make more money. Annuities also do not have limits on how much you can contribute to them each year, allowing you to invest as much as you would like into the account for your retirement. 

There are several varieties of annuities to choose from. You can pay all of it at once or have monthly payments into it, depending on what works for you. You can also go with a fixed or variable annuity. With a fixed annuity, you choose a financial entity that will choose how to invest your funds, with no input from you. Or you can go with a variable annuity, which gives you a list of investment options you can choose from. 

You can choose to purchase your annuity with pre-tax or after-tax money. The method you use will help you figure out how you are taxed. If you use pre-tax dollars, you will have to pay tax on the income when you take it out of the annuity. If you use after-tax money, you can withdraw the money without taxes. 

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What is an IRA?

An IRA is an individual investment account that provides you with tax benefits as you save for your later years. You can open up the IRA for yourself, usually with the help of a financial advisor. When you are married, you and your spouse can open separate accounts and save up for your retirement. 

Keep in mind that with the IRA, you open up an account that will hold onto your different sources of investments, like mutual funds, bonds, and stocks. There are limitations to most IRA accounts, but you can choose from a range of investments and make changes to them if you would like. The amount you make on the IRA will depend on your chosen investments and how well those will do. 

You can choose two types of IRAs, including the Roth and the traditional IRA. With the traditional IRA, your contributions are made with pre-tax dollars, which can help cut down on the taxes you will owe that year. When you withdraw the money, you will be taxed on that money as income. With Roth IRAs, you pay taxes that year and then make a contribution to the account. When you withdraw the money later, you will not owe taxes since you have already paid for them. 

There are limits on how much you can contribute to these accounts. The maximum is $6500 a year (unless you are older than 50. Then you can contribute $7500). It would be best if you waited until you were at least 59 ½ to withdraw from this account to avoid taxes and penalties. 

Should I Choose an Annuity or an IRA?

The decision between an annuity or an IRA depends on your preference. While many individuals will go with an IRA to help them because it is more well-known and easier to find a financial advisor to help them, this doesn’t mean that an annuity is a bad idea, and you should avoid it. 

There are several instances where you should choose an annuity over an IRA. First, you should go with the annuity if you are trying to catch up with your retirement savings. There are no contribution limits on the annuity, like there are with the IRA, making this a much better option. Suppose you have already maxed out your IRA. In that case, you can switch over to the annuity to continue the savings and have more set aside. 

For those individuals who earn more than the income limits of the IRA, the annuity is a good retirement option. They won’t have to worry about income limits and can save for their retirement, even when they are blocked from some of the other options. Many annuities do well on the market, especially over long-term investing, which can help you get the best results for your retirement. 

The Bottom Line

There are a lot of great investment opportunities you can choose to use depending on your needs and wants in retirement. Take a look at some of the different options available for annuities and see whether this is the right choice for you. Researching all of the options can make a big difference and helps you take control and have enough money to live in your later years.