But many financial advisers say it makes little sense to hold an annuity in a retirement account such as a traditional or Roth IRA because it would be similar to wearing a raincoat indoors. One of the main advantages of an annuity is that your money grows tax-deferred. However, any asset — stocks, bonds and annuities — that are held in an IRA is automatically tax-deferred.
“Is it a good idea to buy an annuity within an IRA? At first blush, the answer would seem to be 'no' because one of the biggest benefits of an annuity is tax deferral, which you already have in an IRA. But it's not so simple,” said
“If an annuity product meets a client's needs in the best way, the fact that you are putting a tax-deferred product inside of an IRA that already provides tax deferral is irrelevant,” he said.
His example is a client who needs to supplement her income with a five-year fixed-rate investment. She could choose a corporate bond paying 2.5 percent, a bank CD paying 2 percent, or a fixed annuity yielding 3 percent.
“In that example, two of the options are not tax-deferred,”
Annuities come in different shapes and sizes. Essentially, how they work is the investor hands over a lump sum of cash to an insurance company, which invests the money and guarantees the annuity owner a stream of guaranteed lifetime income. The drawback is that once the buyer enters the contract, he cannot get his capital back and has little to no ability to change the income stream once it starts.
There are no direct fees associated with fixed-rate annuities. Variable annuities are a different story.
Variable annuities can potentially lose money and the earnings rate is not guaranteed. An annual fee for variable annuities that typically ranges from 1 percent to 2 percent also is charged to the investor's account, which acts as a drag on the money that would otherwise accumulate.
“The problem I have is using an annuity as a pension,”
“What if you have a lifestyle or investment opportunity and you only have a monthly check?” he said. “Flexibility with one's money is a valuable commodity.
“Once you annuitize that money and make it a monthly pension, you've lost all flexibility. You can annuitize for your life and your spouse's life, and what if the next day you are both killed in an accident. What do your kids get? Nothing.”
In an age where company pensions are going by the wayside,
He noted every annuity product has its own minimum deposit requirement, which typically ranges between
“My main contradiction to the advice handed down by many financial advisers is you can't lump all annuities into one category and say none of them should be placed in an IRA account,”
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