Why an Annuity Doesn't Make Sense in an IRA

by Mike
(Tampa, Florida)

Before I state my point of view as to why an annuity doesn't make sense in an IRA, it might be instructive to review the rational for purchasing an annuity.

Remember an annuity is a contract between an individual and an insurance company, under which the individual makes one large payment or a series of payments. In return, the insurer agrees to make periodic payments to the purchaser beginning immediately or at some future date.

Annuities typically provide tax deferral on earnings, ability to name beneficiaries to receive the balance remaining in the account on death, and depending on the annuity, the ability to receive distribution payments for life.

The following are reasons why it doesn't make sense for an annuity to be included in an IRA: First, income deferral, is utterly immaterial if the annuity is held in an IRA or retirement account. The IRA already provides for the deferral and, in fact, distributions are governed by the provisions of Section 72 of the IRS code applicable to IRA retirement plans, not the annuity provisions!

The second reason that of beneficiary designation is also immaterial for annuities in a retirement account as IRA's already provide for beneficiary designations outside of probate.

The third reason, life time payout, is potentially valid, since that is one method to convert the IRA balance into an income stream.