Alternate name: Personal retirement annuity
The annuity is issued in your name, and only you or your beneficiaries can receive the payments. You can’t transfer any portion of the individual retirement annuity to anyone except the issuer. You also can’t make more than the annual contribution for an individual retirement account. Money in an individual retirement annuity can grow tax deferred, then you take the required minimum distribution by April 1 following the year you turn 72. Individual retirement annuities often have annual fees and/or fund fees and a minimum deposit requirement. For example, Fidelity offers a Fidelity Personal Retirement Annuity issued by Fidelity Investments Life Insurance Company that allows you to choose from 55 funds. The minimum investment is $10,000. You can self-manage the annuity, rely on automated management, or invest in funds that focus on a particular sector. Annual fees are 0.25% for contracts purchased for less than $1 million or 0.1% for contracts purchased for more than $1 million.
How Does an Individual Retirement Annuity Work?
An individual retirement annuity works like any annuity. You pay an insurance company money upfront, and it promises to pay it back to you at a later date, with interest. Many retirees like annuities because they offer tax-deferred growth and a steady stream of income in retirement. This type of contract can provide peace of mind to individuals who aren’t sure if their Social Security and other retirement benefits will be enough retirement income. You can purchase an individual retirement annuity through a life insurance company. It holds either fixed annuities or variable annuities. This is in contrast to IRAs, which can hold a wider range of assets, such as stocks and bonds.
A fixed annuity guarantees a minimum rate of return and a set number of payments. A variable annuity invests your premiums into mutual funds that you choose. Your rate of return and number of payments depends on how your investments perform. An indexed annuity holds a combination of features from a fixed annuity and a variable annuity.
The Internal Revenue Service (IRS) has specific rules on individual retirement annuities.
Non-Transferrable
Unlike regular annuities that can be given away, individual retirement annuities can’t be transferred to another person. You’re the only person who can receive payments. The only exception is if you die before your annuity contract expires, in which case, the payments would go to your named beneficiaries.
Flexible Monthly Premiums
Individual retirement annuities must have flexible monthly premiums. This is a rule instituted by the IRS so you can contribute as much or as little as your income allows.
Annual Contribution Limits
While most annuities don’t have contribution limits, individual retirement annuities do.
Required Minimum Distributions
Similar to other tax-deferred retirement accounts, you must start taking required minimum distributions (RMDs) by April 1 the year after you turn 72. These withdrawals count toward your taxable income for the year. You’re not required to take RMDs or pay taxes on an individual retirement annuity held in a Roth account. This type of annuity is funded with after-tax money and grows tax-free into retirement.
What Is the Difference Between an IRA and an Individual Retirement Annuity?
Help you save for retirementHave the same annual contribution limitsCan be opened as traditional accounts (if you want tax benefits now) or Roth accounts (if you want tax benefits in retirement)
However, individual retirement annuities can only hold fixed or variable annuities offered by an insurance company. IRAs, on the other hand, can include a wide range of investments, including annuities, but also stocks, bonds, mutual funds, ETFs, and real estate. Annuity payments are guaranteed by the insurance company for a set period of time, although your monthly payments may fluctuate if you have a variable annuity. In contrast, money held in an IRA isn’t guaranteed and could lose value depending on how it’s invested. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
