IRA Annuity: Should annuities be used with IRAs?

The Annuity Man

There is a reason 3 guys are wearing both “belts and suspenders” in the picture above this article.  It’s not because I grew up in the south and that’s how my Uncle Joe looked at the family reunion!  It’s due to the fact that some people mistakenly think using IRA money to fund annuities is duplicitous.  Or as Jim Carrey said in the movie Dumb & Dumber....”you can't triple stamp a double stamp!”

Annuity “know nothing at-alls” typically exclaim, “Why would you put a tax-deferred strategy in a tax-deferred structure?”  In other words, why would you put an annuity in an IRA?  If you think that is a good question, you need to start laying off grandpa’s cough medicine.

It is true that annuities can provide tax-deferred growth just like your Traditional IRA or 401k type structure.  It is also true that an annuity inside of an IRA will not provide “double tax-deferral.”  People and advisors that are spewing this obvious nonsense are missing the bigger point.  That point is when an annuity is used in an IRA, it's there for the transfer of risk contractual guarantee.

Willie Sutton Annuity Analysis

A formerly famous “bank consultant” provides timeless insight to why it’s totally acceptable to use annuities within Individual Retirement Accounts (IRAs).  His brutally factual comment of “That’s where the money is” explains why IRA assets are used to purchase annuities. 

For those of you who don’t know Wille Sutton, let’s just say he was in the banking business for a while.  His famous quote applies to where the majority of today's retirement assets are held.  In 2018, over 7 trillion dollars were held in IRAs according to Statista.com. That’s a lot of “jack”...Jack!

With over 10,000 baby boomers reaching retirement age every single day, the vast majority of their retirement savings is in some type of deferred retirement plan or IRA.  If they want contractual guarantees using annuities, then there’s only one large money pot to pull from.

It’s All About The Guarantees

If you are purchasing any type of annuity with IRA assets, you are doing so for the contractual guarantees that policy provides.  Annuities are transfer or risk contracts issued by life insurance companies that primarily solve for lifetime income.  In fact, annuities are the only financial product on the planet that can guarantee an income steam you can never outlive.  The monopoly on lifetime income belongs solely to the annuity category.

So if you buy a Single Premium Immediate Annuity (SPIA) to solve for the fear of outliving your money (i.e. longevity risk) using IRA assets, then you are doing so for the contractual guarantees.  Any money coming out of a Traditional IRA is taxable, which includes annuities.  Who cares!?  You are buying the SPIA for the lifetime income.

If you purchase a Multi-Year Guarantee Annuity (MYGA) for a guaranteed annual interest rate using IRA assets, you are making that decision for that guaranteed annual interest rate. Even though MYGAs grow tax-deferred in a non-IRA account, a MYGA in a Traditional IRA makes sense as well because of the contractually guaranteed interest.

The same factual analysis can be made with every type of annuity.  You buy it for the contractual guarantee.  You own it for what the policy “Will Do,” not what it might do. Whether that annuity is in a Traditional IRA or non-IRA is irrelevant.  If you use Roth IRA assets to purchase an annuity, you still are buying it for the contractual guarantee...but the “belts and suspenders” argument is irrelevant because you have already paid the taxes.

RMD Turnkey

Taking your Required Minimum Distributions (RMDs) is the equivalent of the IRS tapping you on the shoulder at your age 72 and saying, “it’s time to pay taxes on all of that money you have been deferring."

If you own an income annuity within your Traditional IRA, that payment stream fully satisfies the RMDs for that specific annuity asset.  It’s totally turnkey.  The only minor caveat is that you can’t use any “overage” from that income stream to apply to RMDs for any non-annuity assets within your IRA.  Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) can all be used inside Traditional IRAs for lifetime income guarantees.

So to answer that often asked question one more time, “Should annuities be used with Traditional IRAs?”....the answer is yes, but only if you are looking for contractual guarantees.  If you don’t need those type of transfer of risk strategies, then continue to use non-annuity investments within your IRA.

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