Annuity vs. IRA Strategies for Your Retirement

Is One Better Than the Other or Should You Have Both?

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Let’s face it—for the average person, figuring out a retirement plan can be hard. There are so many different investment options and account types, each filled with acronyms and terms like 401(k), IRA, and 403(b). It’s difficult to know what to do, but retirement plans don't have to remain a mystery.

While common, there's still a lot of confusion surrounding IRAs and annuities, so let's start there. Here's a breakdown on what the two terms mean and how they differ.


An IRA is an Individual Retirement Account. It comes in two basic forms, traditional and Roth. The differences between the two mostly boil down to when the account holder pays taxes on the funds.

For example, people who believe they’ll be in a higher tax bracket later in life usually pick the Roth account because they pay the taxes now, then withdraw the money tax-free later in life. Others may prefer to get the tax break now, so they choose the traditional account and pay taxes on the money later, when they withdraw their funds.

Regardless of whether you opt for the traditional or the Roth, there are a few things to understand about IRAs:

  • An IRA isn’t an investment; it’s simply an account. In that account, you can hold investments in stocks, bonds, ETFs, mutual funds, and more.
  • It’s for one person only. Your spouse or other family members need to open their own IRA if they want that type of retirement account.
  • There are annual contribution limits. In 2021 and 2022, that limit is $6,000. Those 50 or older are allowed to save an extra $1,000 every year, bringing the annual total to $7,000.
  • Your income affects your Roth IRA eligibility. In general, the more you make, the less you can use a Roth IRA. Contribution limits for 2021 start decreasing when an individual makes $125,000 annually. Those who make $140,000 or more as an individual cannot contribute to a Roth IRA. Married couples filing jointly will find that the phase-out begins at a combined annual income of $198,000 and stops altogether at $208,000. For 2022, contributions are limited for individuals making $129,000 and over, with those making more than $144,000 being prohibited from contributing to a Roth IRA. The 2022 limits for married couples filing jointly phase out beginning at a combined income of $204,000 and are eliminated altogether at a combined income of $214,000.
  • Like other types of retirement accounts, early withdrawals (those made before age 59.5) are often subject to penalties.
  • Nontraditional investments such as real estate, jewelry, or private business investments might be available in an IRA, but they come with extra complications and it's best to consult an expert about these options.
  • The performance of the account depends on how well the investments inside the account perform. Your money is not protected from market risks.


The greatest advantage of owning an annuity is that it provides a source of guaranteed payment, either on a monthly, quarterly, annual, or lump sum basis. That's because, as opposed to investment products like an IRA, an annuity is an insurance product (though some annuities include market exposure). In general, when a recession hits, retirement accounts consisting of annuities won't feel the pain of the economic downturn as harshly as retirement accounts built entirely on investments.

Here are a few facts about annuities:

  • Annuities can be jointly owned.
  • There is a wide range of annuity options to fit every income level, family size, and other financial situations.
  • Some annuities begin payments within a year.
  • Like other retirement options, annuities come with tax incentives and penalties for early withdrawals.
  • Except for variable and index annuities, annuity returns aren't affected by market conditions.
  • Annuities typically come with higher fees and expenses than IRA investment options.
  • Annuities may be shielded from bankruptcy or creditors in some states, just like IRAs or other retirement accounts.

Which Is Best?

First, understand that even the financial experts passionately disagree. While some advisors will sing the praises of annuities over IRAs, others have strong words against them. Financial adviser Ken Fisher famously said, “I'd die and go to hell before selling an annuity.”

Despite Fisher's strong stance, average investors don't have to make an either/or decision. You can have both! Many view insurance products, like annuities, as a way of protecting money, while investment products, like IRAs, are better at building wealth. Some people even choose to put some of their IRA funds into annuities, but before you do that, keep in mind that it may complicate restrictions on ownership or distribution timelines.

In general, the closer one is to retirement, the more interested that person becomes in protecting their assets. An annuity might be more appropriate for the person or family with fewer working years left.

If annuities help protect assets, you might be wondering why Fisher would have such strong words for annuities. He's echoing a commonly held view that many annuities charge too much in fees. However, not all annuities use the same fee structure. Some annuities might offer reasonable fees that compete with IRA investment options, but to be sure, it's best to consult someone who knows the ins and outs of insurance and investment products.

You might pick an IRA over an annuity, or the other way around, but there’s no reason you can’t hold both—especially if you've maxed out your contributions in other tax-advantaged retirement accounts.

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  1. Internal Revenue Service. "Traditional and Roth IRAs."

  2. Internal Revenue Service. "Retirement Topics—IRA Contribution Limits."

  3. Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2021."

  4. Internal Revenue Service. "IRS Announces Changes to Retirement Plans for 2022."

  5. Internal Revenue Service. "Retirement Topics—Exceptions to Tax on Early Distributions."

  6. Internal Revenue Service. "IRA FAQs—Investments."

  7. Internal Revenue Service. "Publication 575 (2020), Pension and Annuity Income."

  8. Ken Fisher. "Why I Still Hate Annuities: Here Are the Reasons These Investments Are Bogus."

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