IRA vs. Annuity

What is the difference between an IRS vs. annuity? They both are a tax advantaged way to save for retirement. On one hand, an IRA is a vehicle that holds assets like stocks, bonds, and mutual funds. Whereas an annuity is an insurance asset designed to produce income. In this article, we will go over the difference between IRA vs. annuity.

IRA

IRA stands for Individual Retirement Account. It is a type of investment account with tax benefits. You can keep stocks, bonds, and mutual funds in these accounts. You can hold your earnings in the account to accumulate interest and income. There are two types of IRAs, Traditional and Roth. Traditional accounts are funded with pretax dollars and any withdrawals are taxed as income. Whereas Roth IRAs are funded with after-tax dollars and withdrawals are not subject to taxes. There are limits on what you can contribute to these accounts. In 2024 this limit is $7,000. There are also limits on when you can make withdrawals. You can start taking withdrawals at 59 1/2 . If you take funds out before these times you are subject to a 10% penalty.

Annuity

An annuity is an insurance product that provides you with an income stream during your retirement. These types of accounts can be owned individually or jointly. Annuities grow tax deferred and have no annual contribution limit. There are many types of annuities. There are immediate annuities, these begin to give you payments as soon as your investment has been made. On the other hand, deferred annuities grow for a specific time and then you can begin to take withdrawals during retirement. Fixed annuities receive a fixed rate of return during the annuitization period. Whereas variable annuities have no guarantee of returns. You can purchase annuities with pretax or after-tax funds. Which you use will determine your taxation. With pretax funds the full payments you receive are taxable. With after-tax funds only the portion that represents your earnings is taxable.

Choosing an IRA vs. Annuity

IRA vs. annuity is not an option where you just must pick one. You can use both in your investment portfolio to plan for retirement. An investment advisor can help you plan properly with these investment vehicles.

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