Individual retirement accounts (IRAs) and annuities offer different paths to retirement security. An IRA provides tax advantages for your retirement savings, while an annuity can guarantee a steady income.

Understanding the unique features and benefits of annuities versus IRAs helps you choose which option best supports your retirement goals. Here's what you need to know.

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What’s an annuity?

An annuity is a financial contract between you and an insurance company that converts your deposit into regular payments. The payout structure depends on your contract type. Some start as soon as 30 days after your deposit, while others grow tax-deferred for years.

There are three main types of annuities to choose from:

• Fixed annuities provide a guaranteed interest rate on your deposit for predictable growth over time.
• Variable annuities let you invest in options like mutual funds that grow based on market performance.
• Indexed annuities accrue based on market indexes like the S&P 500^® and usually come with guaranteed minimum earnings.

You can either purchase an annuity directly or contribute IRA funds into these accounts. This flexibility makes annuities versatile tools for retirement planning, whether you're looking for immediate income or long-term growth potential.

8 pros and cons of annuities

Like any financial product, annuities have their own set of pros and cons:

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What’s an IRA?

An IRA is a tax-advantaged retirement account that allows you to invest in assets of your choosing, such as stocks, bonds, annuities, and mutual funds.

Just as there are different types of annuities, there are different types of IRAs to suit various financial situations. Traditional IRAs offer tax-deferred growth, meaning you don't pay taxes on your earnings until you make withdrawals in retirement. Your contributions may also be tax-deductible, lowering your current tax bill.

With a Roth IRA, you pay income taxes on your contributions up front, but your money grows tax-free, and you won't pay taxes when you withdraw funds in retirement. This makes Roth IRAs particularly attractive if you expect to be in a higher tax bracket when you retire.

In 2025, you can contribute up to $7,000 to your IRA (or $8,000 if you're 50 or older). While penalty-free withdrawals are typically restricted until age 59½, certain exceptions exist for life events like first-time home purchases or qualified education expenses.

8 pros and cons of IRAs

Just like annuities, IRAs have pros and cons to consider before opening an account:

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Annuity vs IRA: 7 differences

While both of these accounts help build your retirement savings, an annuity isn’t the same as an IRA. Here are seven key differences between the two.

1. Control over investments

IRAs give you total control over your money — you can choose where to put your funds and change these investments whenever you like.

With fixed annuities, the insurance company manages your money and provides guaranteed rates. For variable and indexed annuities, the insurer may provide a preset list of assets for you to choose — often money market funds.

2. Payment schedules

IRAs focus on long-term savings, typically until retirement age. While you can withdraw funds earlier, you'll usually face penalties before age 59½.

But annuities offer more timing choices. For instance, immediate annuities start paying within 30 days, while deferred accounts grow your money for future use.

3. Customization options

IRAs keep things simple: You choose your investments and contribution schedule.

Annuities offer more ways to customize your contract. Fixed annuities provide steady growth, while variable and indexed annuities let you take on more risk for potentially higher gains. You can also add optional features called riders for extra benefits such as inflation protection.

4. Account management

With IRAs, you make investment decisions yourself or work with a financial advisor of your choice.

When you buy an annuity, the insurance company manages your money based on your contract type. While financial advisors can help you choose an annuity, the insurance company ultimately manages your money according to the terms you select.

5. Tax treatment

Annuities, Roth IRAs, and traditional IRAs each have different tax advantages. Traditional IRAs offer tax-deferred growth and may be tax deductible, while Roth IRAs provide tax-free withdrawals in retirement.

On the other hand, most annuities grow tax-deferred but withdrawals are typically taxed as ordinary income.

6. Required withdrawals

Traditional IRAs require you to start taking payments at age 73. For Roth IRAs, withdrawals aren’t regulated until the account owner’s death.

Annuities offer more flexibility, generally letting you choose when to start receiving payments according to your contract terms.

7. Death benefits and inheritance

IRAs pass directly to your named beneficiaries, who have specific options for withdrawing the money.

Annuities can include death benefit features, so your beneficiaries receive your remaining assets (if any), a preset minimum amount, or another arrangement.

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How to decide between an annuity vs. IRA

When it comes to retirement savings, there are pros and cons of both annuities and IRAs. To choose between these retirement options, consider the following:

• Income needs: Do you want guaranteed payments or flexible access to your money?
• Risk tolerance: Are you comfortable with market volatility, or do you prefer guaranteed earnings?
• Tax situation: Would you benefit more from tax deductions now or tax-free withdrawals later?
• Time horizon: When do you need to access your retirement savings?
• Contribution capacity: Will you exceed IRA contribution limits?

You can also use both options as part of your retirement strategy. For example, an IRA provides growth and flexibility, while an annuity supplies guaranteed income. This combination helps balance different retirement needs while taking advantage of different tax benefits.

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FAQs

What’s an IRA annuity?

An IRA annuity lets you hold an annuity inside an IRA. It combines the tax advantages of IRAs with the guaranteed income of annuities. 

However, withdrawals are subject to both IRA rules (including potential early withdrawal penalties before age 59½) and annuity contract terms (such as surrender charges in early years).

Which annuity allows contributions to an IRA?

You can’t contribute annuity income to an IRA. But the opposite is possible — you can easily contribute IRA funds to purchase an annuity.

Can you transfer an annuity to an IRA without penalty?

If you purchase an annuity with pre-tax dollars — also known as a qualified annuity — you can usually roll those funds over into a traditional IRA without tax implications. But if you buy an annuity with after-tax funds (non-qualified annuity), you generally can’t transfer it into an IRA. And neither type of annuity rolls over into a Roth IRA.

You can typically move funds in the other direction, from an IRA to an annuity, through a direct transfer.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.