Annuity vs IRA

Difference Between Annuity vs IRA

What is Annuity and how does it work?

An annuity is an option in which periodic withdrawals are made. This is an agreement made between the investor and the third party where the investor pays the entire amount to the company and receives an installment amount once the retirement age has reached. Thus, the annuity provides a steady income once retirement age is reached. Annuities are insurance products designed to provide investors with an income stream. There are annuities which also include provide death benefits and provides the beneficiaries with the pre-decided amount in case of sudden death before the end of the tenure. Annuities can be brought with the money held in the taxable account. Annuities can be jointly owned

What is IRA and how does it work?

In an IRA investors invest some amount of money for retirement savings in an account by the inventor’s employer. They are similar to annuities in a way that money is allocated to different asset classes. This account contains a sum of money which are kept aside from the taxable accounts. Money can be contributed on a pre-tax basis and no taxes are charged until any withdrawal is made. A 10% tax is applied as a penalty on withdrawals. However, there are exceptions to these cases like to buy a house for the first time there is no penalty required. IRA is also based on income and individuals below a certain income may not be eligible.

Head To Head Comparison Between Annuity vs IRA (Infographics)

Below is the top 13 difference between Annuity vs IRA:

Key Differences between Annuity vs IRA

Both Annuities vs IRA are popular choices in the market; let us discuss some of the major Difference Between Annuity vs IRA

• An annuity is not tax deductible while the IRA is either partial or the entire amount is tax deductible.
• The annuity withdrawals are not tax deductible but they do allow for IT deferral while for IRA withdrawals are tax-free.
• Annuities offer life insurance coverage. (A certain fee may have to be paid). IRA has a limit to the annual contributions.
• It is best for individuals nearing retirement with beneficiaries. And is best suited for individuals who need fixed payments in retirement. IRA is suited for self-sufficient investors and for individuals who are away from retirement age.
• Fees to manage annuity are higher while fees to manage IRA are comparatively lower
• Following are the main types of annuity.

Fixed Annuities

These types of annuities are not affected by changes in interest rates or market fluctuations and are thus the safest types of annuities. Types of fixed annuities are Immediate Annuity and Deferred Annuity. In an immediate annuity, the investor receives payments as soon as he makes the first investment. In a deferred annuity, the money is accumulated for a predetermined period before the payments begin.

Variable Annuities

These annuities as the name suggests are variable in nature and give an opportunity for investors to generate a high rate of returns by investing in equity or bonds. Income will depend on the performance of these assets. This is meant for investors who are ready to take the risks.

• Following are the main types of IRA

Traditional IRA

Funds are not subject to any tax unless they are withdrawn. 10% penalty is charged if they are withdrawn before retirement.

Roth IRA

In the case of Roth IRA funds are taxable each year. Annual contributions are made after tax and therefore there will be no charge at the retirement period. This option is considered to be more beneficial than the traditional IRA.

• An annuity can be jointly owned while the IRA is for one person only. Every person of the family has to have their own IRA
• Withdrawal charges are heavy. There may be sales commissions. There is no built-in payout control.

Annuity vs IRA Comparison Table

Let’s look at the top 13 Comparison between Annuity vs IRA

Conclusion –

Both Annuity vs IRA provides sound retirement plans if managed properly. The annuity has a large number of options while IRA as specified has two types of options Traditional and Roth. The main difference between Annuity vs IRA schemes lies in the amount of contribution limit. Contributions in IRA are restricted with limited funds while annuity is not affected by any such limitations. Both Annuity vs IRA products provide the chance to increase and grow your investment on a tax-deferred basis. An important point to note is that these investments are not mutually exclusive and an investor can invest in both these products if he wished to. However, there is no reason why an individual should opt for both especially if they have exhausted the tax-advantaged accounts.

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