Is It Foolish To Own An Income Annuity In Your IRA?


No, quite the opposite. There is no reason why an IRA cannot own an annuity. Every year, billions of IRA dollars are used this way.

The purpose of an IRA is to create future income distributions. These distributions from your IRA will be taxable regardless of what is owned within the IRA. To keep this simple, when it’s time to receive these income distributions, most people want two things: They want to never lose principal and they want the maximum amount of lifetime income. More is better both in terms of guarantees and amounts.

Let’s assume you have two identical IRAs and both are worth $500,000. Let’s further assume that you must begin taking distributions today, per the IRS. These distributions are also known as required minimum distributions or RMDs. You are 71 years old and the contributions into these two IRAs were identical and made at the exact same time. Everything about these two IRAs is exactly the same except for one thing: IRA #1 is made up of nothing but cash or cash equivalents. IRA #2 owns a special income annuity that PAYS 5%+ FOR LIFE, NEVER LOSES PRINCIPAL, EVERYTHING IS GUARANTEED.

Which IRA would you choose?

Everyone wants IRA #2 with more income that is guaranteed against losses. Some critics argue that the annuity’s tax deferral is wasted in the IRA. Not so. That is a red-herring designed to confuse people. The tax deferral isn’t being “wasted”. It just doesn’t matter because the IRA’s objective is to create income for retirement.

If you accept more risk in IRA #1 as too many people do, you run the risk of outliving your income. Running out of money in 20 years or less is entirely possible. If you lose any principal, it could be much sooner. The most common reason people suffer IRA losses is too much risk. In order to get a decent amount of interest on the principal, many people take too much risk. If your IRA owns an income or indexed annuity, there is no principal risk and you will ALWAYS receive the income distributions.

“You can use any investment you prefer in IRA #1. Nothing will beat a lifetime income return from an annuity without assuming unacceptable risk.”

It does not matter if your money sits in Apple stock, cash or an annuity contract. The IRA rules are clear. The distributions you are required to take are the same. They are a percentage of the IRAs asset value that determines the amount.

Up until recently, there was a long-standing rule of thumb for how to use annuities and IRAs. The rule was quite similar to the municipal bond rule in an IRA that suggests you never purchase them inside of an IRA, because you don’t need tax deferral in an already tax-deferred account.

But this rule has been rendered outdated by significant changes and enhancements to income annuities. There was a time when there may have been good reasons not to purchase annuities for retirement income. But the right indexed annuities are widely accepted for their income riders, their guaranteed living benefit riders, enhanced death benefits, innovative investment features and their outright superior fixed income yields. Currently, the majority of annuities are purchased with funds sourced from retirement accounts. The supporting research about income annuities from economists and professors at Harvard, Yale, Duke, University of Chicago and UCLA is conclusive.

Most annuities are now purchased for their guarantees and lifetime income, not their tax preferences. To quote another expert in the retirement income field, Michael Kitces: “Given these changes, it is perhaps time to abolish the “annuities should never go into an IRA” rule and recognize that it has become more a myth and remnant of old than proper advice in today’s environment.”

Please contact me at 561-869-4500 or complete the contact form on this site to schedule a complementary discussion.


Ted Bernstein

Dedicated to helping people create the ultimate retirement security and protection plan to safeguard their families and businesses. I stress guaranteed income solutions, indexed annuities and state of the art wealth preservation strategies. As the innovator of life insurance products without commissions, my recommendations are impartial, objective and always in the best interests of my clients.

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