What Is the Difference Between an Annuity and an IRA?


Picture this. You’ve been chosen as a contestant on a show called “Plan Your Retirement”. The host pulls you out of the crowd and tells you that you have two choices:

With option number 1, you can get a steady payment you can predict every month unless you choose otherwise.

And with option number two . . . You can get a steady payment that you can predict every month unless you choose otherwise.

Confused to the point of asking “So then what is the difference between an annuity and an IRA?” No one would blame you.

But while IRAs and annuities may share a family resemblance, there are major differences under the hood that can make a huge difference to your retirement prospects. Keep reading and we’ll tell you all about it.

What’s an IRA?

Depending on who you ask, your IRA, or your individual retirement account, is the gold standard of retirement vehicles. The basic premise is simple enough.

First, you contribute money to your IRA while you’re working. And then through a combination of solid investments and savvy purchases, you should eventually end up with enough money to retire comfortably.

You can opt for a traditional IRA, which uses pre-tax dollars and is taxed on withdrawal. Or you can choose a Roth IRA, which takes your post-tax dollars but doesn’t get taxed on withdrawal.

In short, if you think of your IRA as a savings account with a touch of “You’d better not touch this until you’re retiring.” structuring, you’re well on your way to understanding how both traditional and Roth IRAs work.

What’s an Annuity?

This one may seem a little odd to those of us who are used to paying their insurance companies every month, but if your IRA is the account, your annuity is the investment.

Or put another way, an annuity is a product that gives you either regular payments or a lump sum payment after you retire. These annuity payments can continue until death or you can set them up to expire after a certain time period. It’s all up to you.

If you have the misfortune of retiring during a repeat performance of the 2008 financial crisis, at least you’ll know that you’ll still have some money coming in.

What Is the Difference Between an Annuity and an IRA?

So here we are with two different retirement-funding approaches. Both of them can give you extra income and both of them are tax-deferred until withdrawal.  But even so, there are some key differences between them:

  • Annuities offer joint ownership
  • Annuity investment decisions are handled by your insurance company
  • You may have to learn more about structured settlements if you ever have to cash out early

Settling the IRA vs Annuity Debate: Which One Should You Choose?

The nice thing about annuities is that it’s not an issue of asking “what is the difference between an annuity and an IRA?” and then dumping all your cash into one or the other. You can use extra money to fund an annuity and get the benefit of both during your retirement. Talk about a win-win!

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