Using a Roth IRA Annuity for Retirement

There are different financial vehicles that you can use to save for retirement. A Roth individual retirement account is one option; an annuity is another. A Roth IRA annuity combines features of both into a single financial tool. You can get the benefit of steady income with tax-free growth and tax-free withdrawals. However, a Roth IRA annuity may not be right for everyone and it’s helpful to understand how they work before adding one to your retirement plan. A financial advisor can help you determine whether a Roth IRA annuity is suitable for you.

Roth IRA vs. Annuity: What’s the Difference?

A Roth IRA is a tax-advantaged retirement savings account funded with after-tax dollars. That means when it’s time to retire, you can make qualified withdrawals tax-free. The IRS allows you to make penalty-free withdrawals from IRAs starting at age 59 ½.

You can save in a Roth IRA in addition to any money you’re contributing to a 401(k) or similar retirement plan at work. Contributions to a Roth IRA are not tax-deductible, but you may value the ability to make tax-free withdrawals more if you expect to be in a higher tax bracket when you retire.

An annuity is a type of insurance contract. When you purchase an annuity, you pay a premium to the annuity company. Premiums may be paid as a lump sum or in installments. In exchange, the annuity company agrees to make payments back to you beginning at a scheduled date.

Annuities can be immediate, meaning payments begin within a year of purchasing the contract. They can also be deferred, with payments beginning several years in the future. An annuity can provide steady income to you during your lifetime and potentially for the remainder of your spouse’s life should they survive you.

What Is a Roth IRA Annuity?

A Roth IRA annuity is an annuity that’s funded using Roth IRA contributions. You’re getting an annuity contract that will make payments back to you at some point. In the meantime, you’re funding it with after-tax dollars.

The money in a Roth IRA annuity can grow tax-free and withdrawals are tax-free when you begin taking them. How the money grows can depend on what type of annuity you choose. Your options for opening a Roth IRA annuity can include:

Fixed annuities, which offer a fixed rate of return that’s often comparable to what you might get with a certificate of deposit (CD) account
Indexed annuities, which can offer a rate of return that’s based on the performance of an underlying stock market index
Variable annuities, which can offer a variable rate of return based on the performance of an underlying basket of investments

Each type of annuity carries different risks and has a different reward profile.

In terms of tax treatment, Roth IRAs and annuities are subject to different tax rules. Roth IRAs generally allow for qualified tax-free withdrawals, while annuity income can be taxable when you begin taking distributions.

With a Roth IRA annuity, however, Roth IRA tax rules take precedence over annuity tax rules. That can be a pro or a con, depending on your financial situation and where you expect to be tax-wise in retirement.

Advantages of a Roth IRA Annuity

Roth IRA annuities can allow you to enjoy several benefits when planning for retirement. First and perhaps most importantly, you’re funding the annuity with money that you’ve already paid taxes on.

That means you won’t owe any additional tax on withdrawals from the annuity that you make when you retire. Again, that’s because Roth IRA tax rules trump annuity tax requirements.

While the money is in your annuity it can grow on a tax-free basis. The degree of growth that you see is ultimately determined by which type of annuity option you choose. You can decide what kind of annuity — fixed, variable or indexed — is the best fit based on your risk tolerance and goals.

When you’re ready to begin withdrawing money from a Roth IRA, you can use it to fund your retirement in any way that you wish. So, if you’d like to use it to buy an investment property you could. Or you may use that income stream to cover the cost of long-term care if you or your spouse requires a stay in a nursing home.

Roth IRA annuities can offer plenty of flexibility for retirement planning, in addition to any other streams of income you might have, such as Social Security benefits, a pension or 401(k) withdrawals.

Disadvantages of a Roth IRA Annuity

Is a Roth IRA annuity right for everyone? Not necessarily and it’s important to understand the downsides.

First, you’ll need to meet the income requirements for contributing to a Roth IRA. The IRS determines who can save in a Roth account based on their filing status and modified adjusted gross income (AGI).

You can make a full Roth IRA contribution for the 2024 tax year if you:

File single or head of household and your modified AGI is less than $146,000
Are married, file jointly and your AGI is less than $230,000
Are married, file separately and your AGI is less than $10,000

The full regular contribution limit for 2024 is $7,000. You can contribute an additional $1,000 if you’re 50 or older. Contribution amounts begin to phase out once your income exceeds those limits, eventually reducing down to $0. The IRS does not impose income-based limitations for contributions to a traditional IRA.

Assuming that you meet the income requirements, it’s also important to understand any fees you might pay for a Roth IRA annuity. For example, say that you decide to purchase a Roth IRA annuity and change your mind later. You might end up having to fork over a sizable surrender fee to get out of the contract.

Finally, it’s a good idea to assess the growth potential of a Roth IRA annuity. Depending on which type of annuity you choose, you might be able to generate better returns by keeping your money in a Roth IRA instead and investing it in a mix of different mutual funds or exchange-traded funds (ETFs).

Bottom Line

Roth IRAs hold a lot of appeal, thanks to their tax-advantaged status. Annuities, meanwhile, can provide you with reliable income for retirement. Combining both into a Roth IRA annuity is something you might consider if you’d like to enjoy the best of both worlds.

Retirement Planning Tips

Consider talking to your financial advisor about whether a Roth IRA annuity might be right for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re considering any type of annuity, it’s important to do your research and find a reputable company to work with. Comparing annuity reviews and ratings, for example, can give you an idea of a company’s financial strength. Annuity companies with higher credit ratings are typically less likely to default on their obligations to make annuity payments back to their customers. It’s also helpful to weigh the various fees that you might pay to purchase, maintain or surrender an annuity.