What is meant by annuities within IRAs?
An annuity is one of the investment options available for your IRA money, as are mutual funds and certificates of deposit. Most financial planning professionals, however, recommend against holding an annuity within an IRA.
Why invest your IRA in an annuity?
There are two primary reasons why you might want to put your IRA dollars into an annuity. First, you can take advantage of annuitization, creating a stream of income that is guaranteed to last a set period of time, perhaps through the remainder of your life. With an investment in mutual funds, in contrast, you have no assurance that your IRA money will last until your death. Second, if you put your IRA money into certain variable annuities, you may be able to get a death benefit guarantee. With this guarantee, your beneficiaries are somewhat shielded against downturns in the market that might lower the value of your investment.
The death benefit guarantee provides that the insurance company will pay, at your death, either the current value or the original principal less any withdrawals, whichever is greater. Your beneficiary is therefore assured of at least recovering your initial investment less any withdrawals if you should die after a market downturn that has reduced your investment’s value. If you are uncomfortable with the risk of investing in stock funds, for instance, the death benefit guarantee reduces your risk somewhat, from the perspective of the beneficiary or beneficiaries.
What are some arguments against putting your IRA into an annuity?
There are two very strong arguments against putting your IRA money into an annuity. First, both IRAs and annuities are tax-deferral mechanisms. If you are already deferring taxation by setting up an IRA, you gain no further tax advantage from investing in an annuity. Second, with annuities, you are required to pay a mortality and expense fee (generally 1 percent of your investment) along with an annual contract fee. These fees are on top of any custodial fees that you may be paying for your IRA itself. The result is that this combination of fees may eat into the growth of your investment over time.
For more information or assistance with annuities, feel free to reach out to Scarlet Oak Financial Services. We are here to help you navigate the complexities of investing in annuities within IRAs and provide you with expert guidance tailored to your financial goals and needs. Don’t hesitate to contact us for personalized advice and support in making informed decisions regarding your IRA investments.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
