So you wanted a comparison, huh? Well, we’re not going to give you one. No, that would be silly! Annuities and IRAs should be used side-by-side. However, some of their benefits are the same for both annuities and IRAs.
An IRA is an individual retirement account in which you can put financial instruments like stocks, bonds, CDs, and annuities to save tax free toward your end retirement goals. One popular choice is the Roth IRA, wherein you deposit after-tax income to allow your investment to grow tax free, and be withdrawn tax free forever. This is a very popular choice among investors because you pay your taxes up front, and even if the tax rates keep going higher (as they have been) you’ll have already paid your share to Uncle Sam. That’s a pretty sweet deal!
A Roth IRA, just like an annuity, will allow you to grow your money tax-free, and even allow you to save post-tax income without paying more in the future.
So, if you’re looking at both an annuity and an IRA, open both. You’ll be happy you did.
One great way to use them in tandem is to buy a periodic-payment deferred annuity within your individual retirement account, or IRA. Don’t worry, the explanation for how periodic-payment annuities work is actually shorter than the name.
Periodic-payment deferred annuities allow you to build up a retirement income source over a period of time. With the periodic-payment deferred annuity, you are basically funding your own personal pension program, adding money every month, quarter, or even paycheck to grow your total monthly payment when you retire.
Some investors like to start saving in an annuity at a young age, putting just a few dollars in each month to start building up a very safe, very secure, investment for the future. Others, who already have an established retirement fund, like to transfer their income into a annuity as they age, protecting more and more of their assets against downside risk. Wait, we didn’t cover that part…
Annuities, unlike other investments, are actually protected against lost. First, they inherently can’t lose money as part of the contract you sign with the insurance company when you purchase them. Second, most are protected up to as much as $250,000 by your state government. So, should the company writing the policy go bankrupt, your state government will cut you a check for the value of your annuity up to the maximum insured. Pretty cool, huh?
But you’ll also be able to grow your money, not just protect it. In a periodic-payment deferred annuity your returns will be indexed to the stock market, allowing the amount of money you invest to grow, while protecting you from downside. Often, in years of excellent stock market performance, you’ll get anywhere from 7-10% added to your account. In years that the stock market dips, you won’t have any money subtracted from your account, but you won’t have any added either. All in all, annuities make excellent investments, and it would be wise for those nearing retirement to start considering a move from their mutual fund based IRA into an annuity.