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IRA Annuities: How They Work

What are IRA Annuities, How they work, and rollover considerations.

Author: Steven Hart
Date: Jun 30, 2009 - 6:15:31 PM

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Many people already own IRAs, but they don’t know that they don’t have to keep the plan where it is. Actually, they have total control over where their IRA funds are invested. IRA annuities offer a safe alternative and can guarantee the safety of the principal while gaining an opportunity for potentially significant asset growth. IRA annuities often have higher interest rates that bank Certificates of Deposit or savings accounts.

IRA Annuity - What Is It?

IRA annuities are typically recommended by financial advisers for moving money from tax-deferred savings plans like 401(k)s or another IRA. An IRA annuity is issued by an insurance firm. It pays a certain defined amount every month, starting either when the plan owner reaches age 59.5 years or upon retirement. Payouts from the annuity continue throughout the owner’s lifetime. The terms of an IRA annuity can be structured as a joint-and-survivor contract as well. The insurer must pay an annuity that meets the terms of the existing IRA.

Some restrictions are placed on these contracts, however. You can’t take a deduction for the part of the premium that is allocated to life insurance, for example. There are no loan provisions available in IRA annuity contracts, since borrowing is not permissible under an IRA. Also, you must pay high initial fees to the insurance company when obtaining an IRA annuity, so you should understand what amount you pay for the actual annuity and how much goes to the insurer.

Rollover Considerations:

It is possible to roll over your IRA payment into an annuity on a tax-free basis. When an annuity is funded with an IRA, which is a qualified plan, the insurance company issuing the plan creates the IRA annuity, and you can deposit any retirement funds directly into that account. If you choose to fund an immediate annuity with your IRA funds, you will not pay distribution taxes because the transfer of funds is considered a direct rollover.

Buying An IRA Annuity:

If you’re thinking about buying an IRA annuity, do your homework. Find and compare annuity rates and check the financial rating of any insurance company you plan to do business with. Remember, you can lock in an IRA annuity rate through a “rate hold” before the insurer even receives your distribution. This rate will be in place for one to three months while the cash is transferred. The rate-hold period usually begins once your chosen insurer receives all required forms.

View all articles by Steven Hart

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