Ken Nuss

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Is it a good idea to buy an annuity within an IRA or Roth IRA? At first blush, the answer would seem to be no because one of the biggest benefits of an annuity is tax deferral, which you already have in an IRA.

But it’s not so simple. The answer really is, it depends.

It depends on, your age, risk tolerance, desired asset allocation, and many other factors. For many investors, it makes perfect sense to use an annuity in an IRA.

One factor is your life expectancy. If you’re in good health and have a family history of longevity, lifetime income — which only an annuity can deliver – can be invaluable.

Because an annuity can create a lifetime (or joint lifetime) income that cannot be outlived, there’s a compelling reason to consider one, especially when you start taking money out of your IRA. There is no other way to guarantee that your income will last as long as you do.

Different Annuities Have Features That Can Be Valuable in an IRA

Fixed annuities guarantee your principal. They’re designed for people who want to wake up each morning knowing that they have more money than when they went to bed the night before for at least part of their money.

Fixed annuities come in many types. Choosing the type that is suited to meet your goals is also important. One type even offers growth potential along with guarantees.

Any pre-retiree or retiree should consider annuities for part of their IRA portfolio.

 is much like a certificate of deposit, guaranteeing an interest rate for a set period. Because interest is credited annually and reinvested in the annuity and taxation is deferred until interest withdrawals begin, it’s called a deferred annuity. Most MYGAs pay somewhat higher rates than CDs with a comparable term.

Most people need a bond component in their IRA portfolio. Fixed-rate annuities can be an excellent substitute for bonds. They typically offer a guaranteed rate of interest for three to ten years — a period that can be matched to your time horizon. Bond funds, in contrast, don’t offer a guaranteed rate of return. If rates spike, you can lose money.

They’re great for savers who want or need a guaranteed interest rate for some of their money.

, in contrast, pays income immediately. If you’re over 70.5, it also helps fulfill your required minimum distributions (RMDs). It’s a great way to get a guaranteed lifetime income.

An immediate annuity converts an asset to income efficiently, but in return you have little or no ability to change the income stream once it starts. Some retirees don’t like the idea of illiquidity. But it is very hard to obtain the same level of guaranteed lifetime income any other way.

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, also called a longevity annuity, is a type of fixed annuity with a deferred income starting date. It provides guaranteed lifetime, or joint lifetime, income after an initial holding period of anywhere from two years to as much as 40 years.

The main advantage of a DIA is that usually the income payout will be significantly higher than with an immediate annuity. The insurer rewards you for making a long-term commitment and deferring your payout.

qualified longevity annuity contract (QLAC)

 is a recent variation on the DIA. It’s designed to meet specific IRS requirements so that you don’t need to make RMDs on the assets in the QLAC contract. It’s the only way you can legally delay RMDs for a portion of your IRA funds and thus keep more money in your IRA longer.

 uniquely provides growth potential and guaranteed principal protection. Immune to stock-market downturns, it offers a share of the gains when the market goes up. In exchange for a guarantee that you’ll never lose any principal, you’ll typically get only part of the market’s gains — as measured by an index such as the Dow Jones Industrial Average or S&P 500 – as an interest credit. Interest is credited when the index value increases, but when it falls, you lose nothing.

The index annuity is suited for IRA investors who want principal protection but are willing to withstand some interest-rate uncertainty. You get an opportunity to earn more interest than you can get from a fixed-rate annuity or a bank CD. You can shelter some of your money from market risk without locking in a lower interest rate.

Optional guaranteed lifetime-income and/or withdrawal-benefit riders are commonly available for an additional fee.

Unlike fixed annuities, variable annuities do not guarantee principal. While variables offer greater growth potential than fixed annuities, their fees usually make them unsuited for IRAs except under special circumstances. Variable annuities work best in taxable accounts where tax deferral is a major advantage.

Ken Nuss is the chief executive officer of AnnuityAdvantage. 

 is a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. Its team sorts through the array of annuity options to provide each client with product offerings custom tailored to their specific situation. Every annuity offered is filtered, screened and analyzed for client suitability. More information is available at 

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Since an IRA and annuities are both tax-deferred, it might seem like including annuities in your IRA is not the best retirement savings strategy. But incorporating them might actually be a good strategy for you, depending on where you're at in your journey toward retirement. 

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With the stock market seeming to reach new highs almost daily, investors face a quandary. They want to profit if the market stays strong. But many, especially older Americans, also fear the market is due for a major correction sooner or later.

One financial product, the fixed indexed annuity, is immune to stock-market downturns while offering a share of the profits when the market goes up. Fixed indexed annuities now make up 57.6 percent of the fixed annuity market, based on recent sales, according to Beacon Research and the Insured Retirement Institute.

These are complex contracts with many pros and cons. In exchange for a guarantee you’ll never lose any principal, you’ll typically get only part of the market’s gains as an interest credit.

The product is suited for people who want principal protection but are willing to withstand some interest-rate uncertainty. You get an opportunity to earn more interest than you can get from a fixed-rate annuity or a bank CD, allowing you to shelter some of your money from market risk without locking in a lower interest rate.

A fixed indexed annuity is a type of deferred annuity you buy with a premium deposit. It credits interest based on the changes to a market index, such as the Dow Jones Industrial Average or S&P 500. Interest is credited when the index value increases, but when it falls, you lose nothing.

Your principal and all previously credited interest earnings are fully guaranteed, regardless of future years’ index performance.

Fixed indexed annuities are suited for investors with a longer time horizon. They’re not a good place to park short-term money.

People who can meet all but the most unusual liquidity needs from other accounts are good candidates. They have the best potential for higher interest earnings over time.

These products are more complex than traditional fixed-rate annuities or bank CDs. Because several different indexing methods may be available in one policy, with most companies offering annual reallocation windows, it takes some thought to select which method(s) to choose. Comparing products from different insurance companies takes analysis.

You won’t know the interest rate you’ll earn until the index or indexes have completed their measuring period. Usually, this is annually, but some annuities won’t credit earnings till the end of two or three years or more.

Account withdrawals during the policy year (before the index crediting date) will have no index gains for the policy year under most contracts.

If the minimum interest is zero, there may be years when you earn no interest.

How much should you consider putting in fixed indexed annuities?  One way to decide is to ask yourself: How much of my funds am I willing to wait to regrow in case of a market decline before I want or need to access them? 

If you need to withdraw interest earnings annually, I’d recommend plain fixed-rate investments for that portion of your assets. Beyond that, the right mix of fixed-rated, indexed and equity investments is determined by your risk tolerance.

Most fixed indexed annuities reset annually. When an equity investor experiences a market loss, or she must make up that loss in future years just to get back to even. The fixed indexed annuity owner typically starts the year with a clean slate and doesn’t have a deficit to make up.

You don’t pay any income taxes on earnings as long as you keep them in the annuity. With most contracts, you can withdraw up to 10 percent a year without penalty.

Here are some additional details on how fixed indexed annuities work.

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 method measures the percentage change in the underlying index value between at the beginning and the end of the annuity contract year. A 

 method uses two dates that are more than a year apart.

 measures the percentage change in the underlying index value monthly.

In exchange for downside market protection, you’ll usually receive less than 100 percent of the index’s gains. How much you’ll get depends on the limiting factor(s) used.

 is the maximum rate of interest the annuity can earn during the index term. For instance, the annuity may stipulate that the limit is 6 percent for an annual index term. If the index performance does not exceed the cap, you’ll get the full return — unless there’s also a participation rate.

 determines what percentage of the increase in the underlying market index will be used to calculate the index-linked interest credits during the index term. For instance, it may say you’ll get 60 percent of the increase.

 is a percentage that’s deducted from the change in the underlying index value to determine the net amount of index-linked interest credited to the annuity.

Ken Nuss is CEO of AnnuityAdvantage. Based in Medford, Oregon, AnnuityAdvantage is a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. Its team sorts through the array of annuity options to provide each client with product offerings custom tailored to their specific situation. Every annuity offered is filtered, screened and analyzed for client suitability. More information is available at 

Fixed indexed annuities offer a way to protect principal while still getting growth. They're often a good investment solution for older Americans who might be concerned about a potential market correction. Since fixed annuities are shielded from stock-market downturns, they are a good option in this regard. But they do have their complexities, too.

A Way to Get Some Stock-Market Upside without Any Downside

Financial planners recommend splitting your investments among equities and fixed-income investments, usually bonds. But bonds aren’t the only choice.

Fixed-rate annuities provide safe income, but without most of the drawbacks of bonds and bond funds. Annuities can substitute for bonds for part of your fixed-income allocation. 

Issued by insurance companies in exchange for a premium deposit, fixed annuities share many similarities with bonds. Like bonds, multi-year guarantee annuities earn a set rate of interest for a set period, usually three to 10 years.  

But there are some key differences between bonds and fixed annuities, which have more guarantees and lower risk.

You can lose money in bonds. The market value of a bond fluctuates with changes in interest rates. If rates go up and you sell a bond prior to maturity, it will be worth less than its original cost. With an individual bond, you can avoid this problem by holding it to maturity.

But investors in bond funds don’t have that option. If rates spike up after you buy a fund, the value will decline. Especially with a long-term bond fund, you may never recover your full principal.

Owners of individual bonds (except Treasuries) also face default risk.  A company or municipality may run into financial problems and fail to make timely interest or principal payments.  A default means you could lose part or all of your investment.

In contrast, an annuity is guaranteed by the issuing insurance company. State regulators constantly monitor the financial strength of insurers. State guaranty associations provide an additional level of protection.

With fixed annuities, the insurance company bears the underlying investment risk, shielding annuity owners from both bond market volatility and default risk.

Bonds normally pay earnings every six months. With most individual bonds, you can’t reinvest interest so that it can grow and compound.

Bond funds let you reinvest your dividends automatically, but the price per share varies as interest rates change. You may have a gain or loss on reinvested dividends when you cash in the fund.

Fixed annuities let you reinvest interest earnings without risk. Reinvested earnings earn the same rate as the base annuity, so the yield is guaranteed. Contract owners who need income can choose to receive interest earnings monthly, quarterly or annually.  

Interest from corporate bonds and Treasuries is taxable in the year it’s received. Annuities are tax-deferred.

All interest earnings left inside the contract grow and compound tax-deferred until withdrawn, a significant tax-planning benefit. You can wait until retirement, when your tax bracket is likely to be lower, to start receiving payments.

Many corporate and municipal bonds are callable. When rates are high, it may look like you nailed down a great deal. However, a few years later when rates are lower, the issuer may call the bond back and you’ll have to reinvest the proceeds at a lower rate.

Annuities can’t be called. The interest rate is set for the duration of the guarantee period.

Annuities offer the ability to create a guaranteed lifetime income stream via annuitization. It’s the only financial product that offers this option. 

There are a few downsides to fixed annuities.

First, they have less unpenalized liquidity than bonds and bond funds. You can always cash them in, but you’ll pay a penalty for early surrender. Second, interest earnings withdrawn prior to age 59.5 may be subject to a 10 percent IRS penalty.

Because they have less liquidity than bonds, you probably wouldn’t want to put all of your fixed-income investments in annuities.

But there is some liquidity. Many fixed annuities let you withdraw up to 10 percent a year penalty-free. They’re thus more liquid than CDs, which have stiff penalties for early withdrawals.

Current Rates Up to 3.3 percent, Database Shows

Fixed annuities currently pay up to 3.3 percent for a 10-year annuity, up to 3 percent for a five-year contract, and up to 2.1 percent for a three-year annuity, according to AnnuityAdvantage’s database of 290 fixed annuities from 35 insurers.

Ken Nuss is CEO of AnnuityAdvantage. Based in Medford, Or., AnnuityAdvantage is a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. Its team sorts through the array of annuity options to provide each client with product offerings custom tailored to their specific situation. Every annuity offered is filtered, screened and analyzed for client suitability. More information is available at www 

Fixed annuities are a bond substitute offering guarantees, safety, flexibility and tax deferral.