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Annuity in an IRA

There is another question that gets asked occasionally that refers to having an annuity in an IRA.  This question usually comes in the form of, “Should I buy an annuity within an IRA?”

Now, we’ve already discussed the benefits of an annuity.  One of the greatest advantages to having an annuity is that your investment can grow without taxation.  It is a tax-deferred account.  To reiterate, this means that you can deposit your money into the account prior to paying taxes on it.

The benefit here is that you will earn interest on the taxable portion that you were allowed to keep in the account.  Let’s look into why having an annuity in an IRA is not a beneficial idea.  To do this, you have to understand one key component to the IRA.

Why an Annuity in an IRA is Redundant

annuity in an iraFirst, let me draw an analogy here.  There is no reason to use an umbrella while sitting in your living room, and there is no sense in wearing a raincoat while you are shielded from the rain.

The reason this is being said is that an Individual Retirement Account (IRA) is also a tax-deferred account, just as your annuity is.  So to purchase an annuity in an IRA is the equivalent of using an umbrella inside your house.  You are essentially protecting yourself from a loss that is already nullified.

It is redundant.  There are better ways to handle having an annuity and an IRA in parallel than to have the annuity in an IRA.  The following are the exceptions to the rule when having an annuity and IRA or 401(k) together.

Exceptions to the Annuity and IRA Rule

If you are already retired you are an exception.  If you are very close to the age of your retirement then you are also an exception.  Because in these times you may realize that your 401(k) or IRA may eventually run dry.

You could eventually stop collecting payments while still living, and this could be financially disastrous for you or place an undue burden on family members or friends who choose to help you.  So what can be done?

Instead of buying an annuity in an IRA, you can take a portion of your IRA or 401(k) money and purchase an immediate annuity that would offer payments for the rest of your life.  You can take a small enough portion that you won’t suffer large surrender charges and other penalties and ensure that you will at least be collecting some amount of guaranteed payments for the remainder of your days.

This is smart investing.  Holding an annuity in an IRA is not.  It is wasteful of the benefits being offered to you.

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