What Is the Difference Between an Annuity and an IRA?

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states, including yours. Today's topic is, what's the difference between an annuity and an IRA? Let's talk about that.

Okay, so what we're going to talk about today are the annuity types. You have the Multi-Year Guarantee Annuities, Fixed Index Annuities, Variable Annuities, and all that stuff, as well as the account types, IRA, Roth IRA, and non-qualified. We're going to go over all of that in detail. Remember, you can put an annuity inside a Roth IRA, a traditional IRA, and a non-IRA. We call it a non-qualified account. Whether it's a Single Premium Immediate Annuity, Multi-Year Guarantee Annuity, Fixed Index Annuity, Deferred Income Annuity, or Qualified Longevity Annuity Contract, which are used in IRAs, just understand the guarantees are the same. The taxation of it coming out is different, but you can have it in all account types, IRA, Roth IRA, non-IRA.

Annuity Types

Let's talk about the types of annuities. There are Multi-Year Guarantee Annuities, MYGAs. That's the annuity industry version of a CD. There are Fixed Index Annuities. That's a Fixed Annuity, also a CD product. It does have the accumulation value that's tied to a call option. You need to get my book on that. Go to The Annuity Man and you can download the book on that for free. Then there's a Deferred Income Annuity which is an Immediate Annuity that you can defer as short as 13 months and as far out as 40 years.

Then there's a Qualified Longevity Annuity Contract, QLAC, that can be used in a traditional IRA and some employer-sponsored plans. And you can use that for future income needs, and you can defer as far out as age 85 before the income starts, but you don't have to go that far. You can start sooner than that.

Then there are Variable Annuities. I don't sell Variable Annuities. I only sell things that are fixed, products that are fixed, for the "will do" part. You own an annuity for what it will do, not what it might do. And the "will do" is the contractual guarantee. And, Variable Annuities, nothing wrong with them. They have mutual funds inside of them. They call them separate accounts, and they were put on the planet in the 1950s for tax-deferred growth.

And, finally, the granddaddy of them all, Single Premium Immediate Annuities that were put on the planet in the Roman times. In my opinion, those are the best annuities for immediate income right now, what I call "income now." That's a Single Premium Immediate Annuity.

IRA Types

Let's dig in a little deeper about the types of IRAs you can put an annuity inside. You might have a traditional IRA that you have contributed to over all these years. You might have had a 401(k) that you've rolled into an IRA that you can put an annuity inside. You might have inherited an IRA, and then there's the Roth IRA. That's nontaxable.

Client Example

All right, so I got a call the other day from the infamous Ernie, or Chester as I usually call him, who always calls me on the phone. I use the name Chester because that's the typical person who calls me from the South, like my Uncle Chester. And Chester will call and he'll say something like this. "I just bought an IRA annuity." No, you didn't, Chester. You bought an annuity inside an IRA, and there's a difference. And I think, a lot of times, when people buy annuities from, say, bankers, like young bankers, I have cowboy boots older than most bankers; I mean, I've been in the business a long time, there's a lot of blurring between the lines on the definition of an annuity and the account type. You can have an annuity inside a Roth IRA, inside a traditional IRA, or inside a non-IRA, but the annuity is separate.

The House and Furniture

Think about the annuity and IRA conundrum like this. The Roth IRA, the non-qualified account, is the house. The annuity types, the MYGAs, QLACs, DIAs, SPIAs, and all of that are the furniture that goes in the house. So, you have the house, which is the account type, and then you have the annuity inside that specific account like an IRA, non-IRA, or Roth IRA. Now, the guarantees of the annuities are the same as I told Chester. He didn't believe me at first, but now he does. It's just the taxation issues as you bring money out. That's it.

So, when you have an annuity of any type inside of an IRA, a traditional IRA, the taxation is going to be the same. You've been deferring this the whole time with the IRA. Think of the IRA as tapping you on the shoulder, so, when you take money out, it's going to be taxed at ordinary income levels.

The Questions

A common question I get all the time is, "Stan, which annuity type is best to put in an IRA?" There's no good answer, just bad sales pitches. It really comes down to your specific situation. And remember the two questions I always ask. "What do you want the money to contractually do? When do you want those contractual guarantees to start?" From there, I can narrow it down to whether you need an annuity and, if you do, what type will provide the highest contractual guarantee for your specific situation.

So, I get this question all the time. People are looking at annuities. We've gone through the process of asking the two questions. What do you want the money to contractually do? When do you want those contractual guarantees to happen? We've come up with the right, specific type of annuity that will provide the highest contractual guarantees for your specific situation, so the last part of that puzzle is what account type I should put it in. "Stan, I've got a Roth IRA. Stan, I've got a traditional IRA, 401(k) type thing, and then I have just cash. I have a non-qualified account."

Those are things that you and my team need to talk about. There are no perfect answers in the annuity world; they are just bad sales pitches. Never forget that. But we will come up with a plan based on your specific situation whether that annuity guarantee that you're looking at, whether it's principal protection or income for life, whatever we've decided that fits for your specific situation, I will weigh in with my three decades of experience on where that would fit best. It might fit best in your Roth. It might fit best in your traditional IRA. It might fit best in a non-IRA. But that's something that we need to talk about.

And, by the way, if anyone ever says, "Well, you never put an annuity in a traditional IRA," that's garbage. Why? Because the guarantees in an annuity work inside of a traditional IRA, and it might make sense for you to do that. So, don't listen to all the noise. Listen to Stan The Annuity Man. That's the reason that you need to talk with my team. You can go to The Annuity Man and set that appointment, and we'll have that conversation.

Hey, thanks for joining me today. I do encourage you to go to The Annuity Man, to run your own quotes. You can also download my books for free and under no obligation. And you can schedule a call with us, one-on-one for 30 minutes. We will listen to you, put together a customized plan, and even tell you if you do not need an annuity.

And with that, I'll see you on the following Stan The Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.