What Is an Individual Retirement Annuity?

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Definition

An individual retirement annuity is a way to save for retirement by buying an annuity contract issued by a life insurance company.

Definition and Example of an Individual Retirement Annuity

An individual retirement annuity is a type of annuity contract in which you pay premiums, then receive repayments plus interest as income in retirement. It is similar to an individual retirement account (IRA), but instead of holding stocks, bonds, and other securities, an individual retirement annuity only holds fixed or variable annuities.

  • 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.

Note

Annuities are issued through insurance companies, and you can purchase them through insurers, banks, or brokers.

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.

Note

Your annual contribution limit, also known as your annual premium, can’t exceed the yearly contribution limit for traditional and Roth IRAs. For 2022, these limits are $6,000 (or $7,000 if you’re at least age 50).

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?

IRA Individual Retirement Annuity
Can hold stocks, bonds, mutual funds, annuities, and other securities Holds only annuities
Purchased through a brokerage firm Purchased through an insurance company
Has fewer fees Typically has more fees
Potential for higher returns Returns are essentially guaranteed but may not be as high
Has contribution limits set by the IRS Follows IRA contribution limits

Individual retirement annuities are similar to individual retirement accounts (IRAs). They both:

  • Help you save for retirement
  • Have the same annual contribution limits
  • Can 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.

Key Takeaways

  • An individual retirement annuity is a contract from a life insurance company that provides regular payments in your retirement years.
  • An individual retirement annuity has the same contribution limits, withdrawal rules, and distribution requirements as an individual retirement account (IRA).
  • Individual retirement annuities tend to have more fees than IRAs, but they also have the potential to provide reliable income in retirement.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Publication 590-A (2021): Contributions to Individual Retirement Arrangements (IRAs).”

  2. IRS. “Retirement Plans FAQs Regarding Required Minimum Distributions.”

  3. Fidelity. “Fidelity Personal Retirement Annuity.”

  4. Securities and Exchange Commission. “Annuities.”

  5. IRS. “IRS Announces Changes to Retirement Plans for 2022.”

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