There are many similarities between Individual Retirement Accounts and Annuities. However, despite the similarities, both of them are different investment options with some clear differences. Both these investment plans allow you to invest and grow your money.Taxes are deferred in both, IRA and annuity. Both these options are pretty viable for your retirement financial security. Here are some differences between the two.
There are certain limits on IRA
There are certain limits to the amount of money you can contribute to IRA accounts. This means that there is only a certain amount of money that you can invest in the IRAs. On the other hand there are no such limits on the annuity accounts. You can invest as much as you want for annuity.
There are certain situations where the annuities are voluntarily converted into IRAs. In this case the limitations do apply as per the normal IRA guidelines. Both these options are good if you want to reduce the taxes on your money. By moving your savings to IRA or annuities, the taxable amount will get tax deferred and you will only need to pay for taxes at the time of withdrawal.
As already discussed, the IRA money is taxable only at the time of withdrawal. The money kept in IRA can be used in number of ways for further investment options. If you want, you can use the IRA money to invest in buying the stocks, bonds, mutual funds and even the annuities.
On the other hand, annuities are different from IRAs. Annuity is not an investment option handled by the investment company. It is taken care of and managed by an insurance company. Annuity offers many types of income options. You can go for an immediate annuity which starts paying you immediately. However, you can also defer withdrawals for a later stage of your life. Annuity offers multiple income options. You can go for a lump sum amount of money after the end of the contract or you can also opt for part payments.
You can have joint account with annuities
Individual Retirement Accounts, as the name suggest, do not offer the mutual ownership or having a joint account. This means that it will provide retirement benefits only to the person in whose name the account is created. In case of the person’s untimely death, there will be no beneficiaries. However, if you have an annuity account, you can create a joint account and both the partners will have the mutual ownership over it.
You pay taxes on the entire IRA amount
One of the biggest advantages of annuity is that you are charged taxes only on your total earnings over the term at the time of the withdrawal. The entire amount is not subject to taxes. This means you save a significant amount of money. On the other taxes are applicable on the entire withdrawn IRA amount. So there are no savings.
In both the cases, if you withdraw the money before the age of 59 ½ you will be charged 10 percent penalty.