IRA Annuity: How Does It Work?

Hi there, Stan the Annuity Man, America's annuity agent, licensed in all 50 states, including yours. Someone just asked me, "Can you do a rap video?" Not today. But hang in there and watch all my videos, because one of these days, I’m going to throw a rap at you—an annuity rap, which is going to be good. I’ve got that in me.

T-shirt Story

We will talk about IRA annuities, but first, let’s talk about the "Brutal Annuity Truth" t-shirt I'm wearing today because people are dying to know the story. First of all, that’s what I give you: brutal annuity truth. In fact, I was speaking at an event once, and someone introduced me as the walking middle finger of annuity truth, and I love that. That’s beautiful. It’s exactly what I do. If you work with me, I won’t be your friend, but I’ll be the best advisor you’ve ever had because I’ll tell you the brutal truth about annuities. Period. You don’t need any more friends. Do you really want me as a friend? No, you want me as an advisor. You don’t want your surgeon to be your friend; you want him to do the best surgery. Same thing with annuities. I’m that guy. I hope you go to The Annuity Man and connect with me.

Rock and Roll Logo

So, enough about that. Let’s talk about the t-shirt. A little bit about me before we dive into annuities—bear with me, this is interesting. Just hold on. This might look like a rock and roll annuity man thing because it is. I follow a lot of rock bands in my spare time, and I really enjoy going to live music shows. There were a couple of bands whose logos I kept seeing, and I really liked them. So, I went up to them after the show and asked, "Who did your logo?" They told me it was a guy named Christophe Szpajdel from England.

Of course, I’m crazy enough to search for Christophe Szpajdel, and I found out that he’s the number one logo designer for all metal and rock bands in the world. He even has a book on Amazon with all his logos. So, I thought, “Okay, great. How much for an Annuity Man rock and roll logo?” Of course, it was a lot, but I bought it because I’m crazy. And that’s how I got my Annuity Man rock and roll logo. Big thanks to Christophe Szpajdel from England. I hope he’s safe.

IRA Annuities Explained

Alright, no more rock and roll stories—let’s talk about IRA annuities and how they work. First of all, is there such a thing as an IRA annuity? Not really. But many people ask about it, so I thought I’d cover it here on The Annuity Man's website. While there’s no such thing as an “IRA annuity,” you can place annuities inside of an IRA, effectively turning it into what some might call an IRA annuity. However, annuities can be used in any type of account: non-IRA, Roth IRA, traditional IRA, etc.

The contractual guarantees are exactly the same in all of those accounts. Period. The only difference is how you take money out, or if an income stream comes from that specific annuity, how it’s taxed. In a Roth IRA, obviously, it’s non-taxable because you’ve already paid taxes on that money. In a non-qualified account, when you pull money out, that money’s taxed at ordinary income levels unless it’s an annuitized product; in this case, only a portion of the withdrawal is taxed because the income is a combination of return of principal plus interest. So, in a non-IRA account, the return of principal is not taxable—you're only taxed on the interest.

How Taxes Work with Annuities

Regardless of the type of annuity, whether it’s an immediate annuity, deferred income annuity, Qualified Longevity Annuity Contract, Multi-Year Guarantee Annuity, variable annuity, or indexed annuity, the contractual guarantees are the same. The policy works the same way, but when you take money out of an IRA, it’s going to be taxed because the IRS wants its share since you’ve been deferring it all this time.

So, one of the questions I get—actually, I just got this question the other day—was from a guy who called me. We ran some annuity quotes for him, and I asked, “What type of account do you want to use? A non-IRA or IRA account?” He said, “Why would I ever put an annuity inside an IRA?” which is a common but uneducated view. People sometimes say, "Why would you put a tax-deferred product into a tax-deferred instrument?" Let me tell you: because you're buying the contractual guarantee.

The Brutal Annuity Truth

Some journalists and advisors with agendas say, "You should never put an annuity inside an IRA." If anyone tells you that, they’ve revealed their lack of understanding of annuities. It drives me crazy because the brutal annuity truth, as my t-shirt says, is that when you put an annuity inside an IRA, you’re buying it for the contractual guarantee. You’re buying it for what it will do, not what it might do. The reality is that most people’s money is in IRA-type accounts—whether that’s a company 401(k) that eventually rolls over to an IRA or a traditional IRA.

Some conspiracy theorists believe that the advisor world and brokerage firms want to prevent annuities from being sold in IRAs because they want to manage the money and charge fees. But I believe most people just don’t understand IRAs. People buy annuities for the contractual guarantees—they buy them because they’re transfer-of-risk products. Annuities are the only products on the planet that provide income for life, something you can never outlive, which solves the longevity risk—the fear of outliving your money.

Putting Annuities in IRAs

If you’re putting an annuity for its contractual guarantee inside an IRA, great—you’re looking for the guarantee. Let’s say you need income right now. You could put an Immediate Annuity inside the IRA. The income coming out would be taxable at ordinary income levels, but it’s still a contractual guarantee. There’s nothing wrong with that. There are no exceptions to that. There’s nothing wrong with putting an annuity inside an IRA if you’re buying it for the contractual guarantee.

Should You Buy an Annuity?

So, let’s recap. There’s no such thing as an IRA annuity, but you can put annuities inside an IRA. Should you? Before making a decision about buying an annuity, you need to answer two questions: What do you want the money to contractually do? And when do you want those guarantees to start? That will determine if you need an annuity, and which type will provide the highest contractual guarantee.

I’ve come up with an acronym called PILL: “P” stands for principal protection, “I” stands for income for life, “L” stands for legacy, and the other “L” stands for long-term care. If you don’t need to solve for one or more of these items—principal protection, income for life, legacy, or long-term care—then you don’t need an annuity. Never buy an annuity for market growth, in my opinion. Yes, I know the Variable Annuity crowd won’t like that, but that’s my view.

Conclusion

With that said, you need to figure out what type of annuity fits your needs and decide whether to use a non-IRA or IRA account. It really comes down to how the money or income will be taxed. Whether it’s an IRA or non-IRA annuity, you're buying annuities for the contractual guarantee—never forget that.

I encourage you to connect with my team so we can determine the best strategy for you. At the end of the day, I’ll treat you professionally, leave you alone to make your decision and respect your timeline. Don’t believe me? Try me. That’s how I like to be treated as a consumer, and that’s how I treat my clients. I’ll see you on the following Stan The Annuity Man blog.