When it comes to securing a reliable retirement income, an individual retirement annuity is a compelling option — one that often guarantees payments for life.

While traditional individual retirement accounts (IRAs) have long been a staple of retirement planning due to their tax advantages, individual retirement annuities can be a good option for those seeking additional financial stability. 

With predictable payouts and longevity protection, individual retirement annuities offer a different kind of security than investment-based IRAs, which are subject to market fluctuations.

Discover what individual retirement annuities are, their benefits and drawbacks, and how they stack up against IRAs.

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What is an individual retirement annuity?

A traditional individual retirement annuity is a contract between an individual and an insurance company, designed to provide a structured income stream during retirement which . 

There are two main types of individual retirement annuities, fixed and variable, each providing different levels of protection. Both options offer tax-deferred growth, meaning they accumulate tax-free until you start receiving payments, and can be structured to deliver income for life or for a set period. Here’s what they look like:

• Fixed annuities offer a guaranteed interest rate, providing steady, predictable growth with minimal risk. They’re ideal for risk-averse investors seeking stability.
• Variable annuities tie returns to investment options, providing high growth potential alongside market-related risk. These are better suited for those willing to weather volatility.

Individual retirement annuity vs. IRA: What’s the difference?

When comparing an individual retirement annuity to a traditional IRA, the key difference lies in their structure and purpose. IRAs are investments managed by the buyer, typically focused on long-term growth through stocks, bonds, or mutual funds. In contrast, annuities are insurance products that focus on providing a pr guaranteed income stream during retirement prioritize predictability, making them attractive for those who prefer stability over growth potential.

How does an individual retirement annuity work?

Individual retirement annuities are tax-advantaged savings vehicles with structured contributions and payouts. The funds you contribute grow tax deferred until you take a withdrawal.As you contribute funds, the insurance company invests these funds on your behalf, allowing for tax-deferred growth. Once you reach retirement age and start making withdrawals, you receive regular payments based on the contract’s terms. 

Individual retirement annuities are subject to the same IRS contribution limits as traditional and Roth IRAs. For 2025, the limits are:

• $7,000 annually for individuals under 50.
• $8,000 annually for those 50 and older (including a $1,000 catch-up contribution).

These limits apply to total IRA contributions, including annuities and traditional IRAs. 

Annuities operate in two phases: The accumulation phase and the payout phase

Accumulation phase 

During the accumulation phase, you make contributions to your individual retirement annuity retirement plan. These are through a lump sum or periodic payments, depending on the contract. All contributions grow tax-deferred, meaning you won’t pay taxes on any earnings until you withdraw them in retirement. This allows your retirement savings to potentially grow faster over time. 

The accumulation phase typically lasts until retirement or when you elect to begin withdrawals, often over age 59½ to avoid IRS penalties for early withdrawals.

Payout phase

Once you elect to start receiving income, the annuity enters the payout phase. If you funded the annuity with pre-tax dollars, withdrawals are taxed as ordinary income. The options for payouts typically include: 

• Life annuity: Guaranteed income for life.
• Period-certain: Payments for a set term (10 or 20 years, for example).
• Joint-life: Income for you and your spouse, continuing for the survivor’s lifetime.
• Life annuity with period-certain: Combines features of a life annuity and a period-certain, guaranteeing payments for a specific period or the annuitant's lifetime, whichever is longer. 

Pros and cons of individual retirement annuities

Like any financial product, individual retirement annuities have distinct advantages and potential drawbacks. Understanding both is essential before deciding if an annuity is the right investment path for you.

Pros

Guaranteed retirement income

A significant benefit of annuities is the ability to create a guaranteed retirement income stream. Payout options such as a life annuity or a joint-life annuity provide a predictable income until death, protecting against the risk of outliving your savings.can help provide income until death, protecting against the risk of outliving your savings.

Tax-deferred growth on earnings

During the accumulation phase, the earnings within an individual retirement annuity grow tax-deferred. This allows investments to compound without annual tax liability, potentially resulting in greater long-term growth than taxable accounts.

Protection from market volatility

Fixed annuities offer protection from market volatility as they provide a guaranteed interest rate. While variable annuities are tied to market performance, they still provide some structure that can insulate against volatility, depending on how they’re invested can offer greater growth potential. 

Potential death benefits for heirs

Many annuity contracts include death benefit provisions, ensuring your beneficiaries receive the remaining value or a guaranteed amount if you pass away before or during the payout phase. 

Cons

Higher fees than traditional IRAs

Individual retirement annuities often carry higher fees than traditional IRAs invested in mutual funds or ETFs. These may include administrative costs, mortality and expense charges, and rider fees, which can all reduce your overall returns.

Limited investment flexibility

With annuities, investment choices are often limited. Fixed annuities have no investment options at all, while variable annuities typically offer a curated set of sub accounts rather than full market access, as with traditional IRAs.

Surrender charges for early withdrawals

If you need to access your money before the annuity's surrender period ends (often four to 10 years), you will likely face surrender charges as high as 7–10%. These penalties can significantly reduce the amount of money you receive. And, there are tax implications for early withdrawals.

Less control over assets once annuitized

Once you convert your annuity into a stream of income (annuitization), you generally lose access to the principal and have less control over the underlying assets.

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Traditional vs. flexible retirement annuities

Individual retirement annuities come in two forms — traditional and flexible — each offering a unique approach to premium payments, income schedules, and growth potential. Here’s how they differ:

• Traditional annuities involve a set schedule of premium payments and offer fixed interest rates, providing predictability. The schedules are predetermined, with little to no deviation from the original contract terms. This structure offers stability and is well-suited to individuals with low risk tolerance.
• Flexible annuities allow adjustments to contributions and payout schedules. They often include features like guaranteed lifetime withdrawal benefits, offering some liquidity and growth potential. This adaptability would suit those with changing financial needs and a moderate risk tolerance. 

Individual retirement annuity payout and withdrawal

During the payout phase, you receive income based on the terms of your contract. Choosing the right payout structure — whether life, joint-life, period-certain, or life annuity with period-certain — to fit your needs is vital for long-term financial security in retirement. 

When weighing options, consider the following factors: 

• Life expectancy: Your age, health, and family history can help determine how long you may need income. If you expect a longer retirement, a life or joint-life annuity may offer more value. 
• Your beneficiaries’ financial needs: If supporting a dependent is a priority, you may want an option that includes survivor benefits or guarantees and minimum number of payments. 
• Tax implications: Annuity income may be partially taxable, depending on the type and how it was funded. 
• Inflation: Fixed payments may not keep up with the rising cost of living. If you expect a longer retirement, you may want built-in inflation protection. 
• Your overall retirement income strategy: An annuity should work with other income streams to create a balanced, sustainable retirement plan. 

Build a stable foundation for retirement with Gainbridge

For investors seeking flexibility and non tax-deferred growth,  tax-deferred growth, and a guaranteed lifetime withdrawal benefit, ParityFlex™ could be an ideal option. With competitive rates, customizable terms, and no hidden fees, it provides the stability of a fixed annuity with the adaptability to meet changing needs.

Explore Gainbridge's annuity options today and discover how these innovative products can help you achieve your long-term financial goals.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. ParityFlex™ is issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contains terms for keeping them in force.

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