Individual retirement accounts (IRAs) and annuities are common tools used in retirement planning, b🧸ut they are 🐷very different financial products.

Annuities and IRAs can both play a role in funding your 澳洲幸运5官方开奖结果体彩网:retirement and providing income in your later years,🅠 but without a clear understanding of the differences and similarities between the two, you could end up making financial decisions that don't ultimately align with your goals.

Let’s break down how IRAs and annuities compare, and how they can work individually and together to support your retirement.

IRAs vs. Annuities

IRAs are simply a type of retirement account that offers special 澳洲幸运5官方开奖结果体彩网:tax advantages which can vary based on the type of IRA you open. IRAs are not an investment in themselves. Instead, they are acc꧙ountꦚs that hold investments.

Annuities, however, a🅘re neither 🍷an investment nor a type of account.

They are a type of insurance product representing a contract between you and the insurance company. Annuities are typically considered a type of guaran♏teed income, meaning they provide a steady stream of money in retirement. Annuities are generally known for their complexity and high fees, which can erode returns.

To make things more confusing, it's possible to purchase an annuity in an IRA (more on that later). To understand how that works, it's important to know some of the key characteristics of both.

IRAs

IRAs are a type of tax-advantaged account intended for retirement savings. In order to open an IRA, an individual must have 澳洲幸运5官方开奖结果体彩网:earned income, whether that's from wages, tips, commission, or self-employment. Many brokers now allow investors to 澳洲幸运5官方开奖结果体彩网:open IRAs for free, meaning there are no account ope𝔉ning or mainte💛nance fees.

With IRAs, investors are responsible for choosing which assets they want to invest in. Funds inside the account can typically be invested in a variety of assets like 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs), 澳洲幸运5官方开奖结果体彩网:mutual funds, individual stocks, bonds🐠,🦂 money market funds, and CDs.

Some investments, however, may charge fees. For example, ETFs and mutual funds typically charge 澳洲幸运5官方开奖结果体彩网:expense ratios, which are annual 🐭fees charged for the management and adm🐭inistration of funds.

IRAs have annual 澳洲幸运5官方开奖结果体彩网:contribution limits, too. For 2025, individuals can contribute no more than $7,000 annually, unless they're eligible for catch-up contributions. Individuals age 50 and older are eligible to make catch-up contributions worth up to $1,000 for 2025.

Traditional IRAs vs. Roth IRAs

The rules for IRAs vary depending on whether you choose to open a traditional or Roth IRA. 澳洲幸运5官方开奖结果体彩网:Traditional IRAs don't have income limits, so you can open one regardless of how much you earn. With a traditional IRA, you set aside money that grows tax-deferred over ti♈me.

Some individuals may be able to deduct some (or all) of their traditional IRA contributions from their income, depending on whether they have a retirement plan at work and their annual income.

When you take distributions in retirement, that money will be included in your taxable income, and you'll pay ordinary 澳洲幸运5官方开奖结果体彩网:income tax on your withdrawal.

Traditional IRAs also have 澳洲幸运5官方开奖结果体彩网:required mini꧙mum distributions (RMDs), so individuals are typically required to start withdrawing from these accounts at age 73. This is meant to ensure that funds don't grow in the account tax-free indefinitely.

澳洲幸运5官方开奖结果体彩网:Roth IRAs offer a different tax advantage: you contribute after-tax dollars, money grows tax-free, and qualified distributions are tax-free. These accounts also have income requirements. Individuals who make more than $165,000 are ineligible to contribute, while those who earn between $150,000 and $165,00 can make partial contributions. Additionally, Roth IRAs don't have RMDs, so money can grow tax-free indefinitely until the account holder dies.

Since IRAs are meant to encourage retirement saving, there are penalties for 澳洲幸运5官方开奖结果体彩网:withdrawing money early. If you take any money out of an IRA before age 59½ and the distribution isn't qualified, you'll have to pay a 10% penalty on top of ordinary income tax.

Annuities

An annuity is an insurance contract between you and an insurance company where they provide you with regular payments now or in the future. There 𒉰are broadly two types of annuities: deferred and immediate annuities.

With a 澳洲幸运5官方开奖结果体彩网:deferred annuity, investors pay regular premiums for a period of time before they receive regular payments from the insurance company. Conversely, people who invest in an immediate annuity pay a lump sum and immediately receive regular payments.

For example, you may be able to receive a 澳洲幸运5官方开奖结果体彩网:lump-sum payment instead of periodic payments. Or you can opt for systematic withdrawal, where you have control over how much you receive every month and how many payments you want. Still, with this option, income isn't guaranteed, so you could end up outliving your annuity.

Annuities are also known for their illiquidity—annuities may charge 澳洲幸运5官方开奖结果体彩网:surrender fees if you withdraw money before a certain number of years have passed. These fees typically decline the longer your annuity contract has been in force. After the 澳洲幸运5官方开奖结果体彩网:surrender period is up, the fees may no longer apply.

Fixed vs. Variable vs. Indexed Annuities

You can typically gꩵet an immediate or deferred annuity in the form of a fixed, variable, or indexed annuity.

A fixed annuity has a minimum guaranteed interest rate or rate of return (though the interest rate may be adjusted periodically based on the market environment). This makes it a better option for risk-averse investors who want a steady 澳洲幸运5官方开奖结果体彩网:rate of return. If a fixed annuity is also a deferred anꦡnuity, your premium payments earn a fixed rate of return while your money grows before you receive the payout. If a fixed annuity is an immediate annuity, the payments you receive are✅ generally fixed.

澳洲幸运5官方开奖结果体彩网:Variable annuities are a better choice for investors with a higher tolerance for risk and who want to potentially score higher returns. With variable annuities, your money is invested in assets like stocks, bonds, or mutual funds, so your return may vary based on their performance. These annuities also offer a death benefit, which is paid to a beneficiary when the annuity owner dies.

澳洲幸运5官方开奖结果体彩网:Indexed annuities can offer the best of both worlds—they're safer than 🌠variable annuities but offer a higher potential for returns than fixed annuities. These annuities may limit upside and downside potential through the use of certain rules and features.

For example, an 澳洲幸运5官方开奖结果体彩网:equity-indexed annuity (EIA), typically provides a guaranteed minimum interest rate and an interest rate that fluctuates based on the performance of the index the annuity is linked to. An EIA may be linked to the 澳洲幸运5官方开奖结果体彩网:S&P 500, which is an index representing the performance of the 500 largest companies in the U.S. based on 澳洲幸运5官方开奖结果体彩网:market cap. So if the index notched a substantial gain, you wo🐽uld only capture a part of that return.

Additionally, some indexed annuities use what are known as buffers and floors to limit downside potential, so investors don't necessarily bear the full loss. Despite these features, it's still possible for investors to lose money on an indexed annuity.

Tax Treatment of Annuities

The primary benefit of annuities is 澳洲幸运5官方开奖结果体彩网:tax-deferred growth. Yet whether you pay taওxes on your annuity p💖ayouts depends on whether you funded your annuity with pre-tax or post-tax dollars.

For example, if you buy an annuity with already taxed money, only the portion of your payout that's considered earnings will be taxed, not the original contributions. Note that annuities are subject to ordinary income tax, not 澳洲幸运5官方开奖结果体彩网:capital gains tax.

On the other hand, buying an annuity with money that hasn't been taxed usually means you've purchased an annuity within an IRA. If you do this, the rules of the IRA will apply. Thus, the full payout will be subject to income tax.

And note that annuities are also subject to the 10% early withdrawal penalty that applies to early withdrawals from retirement accounts. This means that if you withdraw funds from your annuity before age 59½, even after the surrender period is up, you'll be on the hook for the 10% penalty in addition to any taxes you owe. (This penalty typically only applies to annuity funds that you haven't paid taxes on.)

What About Annuities In IRAs?

Annuities purchased with traditional IRAs or 401(k)s are known as 澳洲幸运5官方开奖结果体彩网:qualified annuities.

If you purchase an annuity in one of these accounts, you may be funding your annuity with pre-tax dollars. This means that when you receive distributions from the annuity in retirement, you must pay ordinary income tax on the entire payout, the original contributions, and the earnings.

Since annuities already offer tax-deferred growth, it may not make sense to use your traditional IRA funds to buy an IRA, as doing so doesn't offer any additional tax benefits. Plus, annuities purchased in traditional IRAs are also subject to RMDs and early withdrawal penalties.

The rules, however, are a bit different for Roth IRAs. Annuity payments are tax-free in retirement because you pay taxes on your Roth contributions.

The Bottom Line

IRAs and annuities can both be used to 澳洲幸运5官方开奖结果体彩网:generate income in retirement. Thꦐere are, however, many differences between the two.

IRAs are a type of account that holds investments and offers different tax benefits depending on if it's a traditional or Roth account. You can open an IRA at many brokerages and financial institutions for free. Plus, many brokerages don't charge commissions when purchasing certain investments like stocks and ETFs, though fees may be charged for managing certain funds.

Annuities are technically not investments bu💟t are considered insurance contracts. With an annuity, retirement savers either make regular payments to receive a payout in the future or provide a lump sum of money to receive a payout immediately. The major tax benefit of annuities is ta♍x-deferred growth.

There are many types of annuities—some may offer a guaranteed minimum interest rate while others have an underlying investment that causes the rate of return to fluctuate. Annuities can be very complex, and there are typically many fees like surrender charges, 澳洲幸运5官方开奖结果体彩网:mortality and expense fees, and administrative fees.