What is the difference between an annuity and an IRA?

This is a common question. It’s not easy to answer it, though, because there are fundamental differences between the two. Put starkly, an IRA is a savings account that offers tax advantages, while an annuity is an insurance product. Read on to understand the difference. 

A mother discusses her retirement plans with her daughter.

An IRA and an annuity are not the same

Both IRAs and deferred annuities are tax-advantaged ways to plan for retirement. But they work in very different ways. As mentioned above, an IRA is a savings account that offers tax advantages. It is like a basket in which you can put different types of investments. Annuities, on the other hand, are insurance products that convert some savings into guaranteed payments. You can even put a deferred annuity in an IRA. Read on for more clarification and comparisons.

What is an IRA?

An individual retirement account (IRA) is a type of retirement savings vehicle that allows investments you make to grow in a tax-advantaged way. They are a great way to save long term for retirement.

How does an IRA work?

An IRA isn’t an investment in and of itself. You can think of an IRA as a shell that surrounds investments that you make and protects them from taxes. Often, these investments are stocks, bonds, mutual funds, or even annuities. Each year, you can invest a certain amount within your IRA account ($6,500 in 2023 and subject to change in the future), and that investment will grow tax free. Yearly IRA investments can add up significantly over time.

Traditional and Roth IRAs

There are two main types of IRAs, and they work a little differently. With a traditional IRA, you are not taxed on money going into the IRA. When you withdraw funds in retirement, though, it’s taxed as ordinary income. With a Roth IRA, the money you put in has already been taxed, but it grows tax free over the years. Those earnings can then be withdrawn tax free if you are 59½ or older and it has been at least five years since you first contributed to the Roth IRA. Both have advantages, but traditional IRAs are more common.

Is an IRA considered an annuity?

No. IRAs are retirement savings accounts. Annuities are insurance products. They work in completely different ways. You can sometimes put annuities in an IRA though, or use tax-qualified IRA funds to purchase an annuity. So there may be some crossover, but it’s the kind of crossover that makes the fundamental differences clear.

What are annuities? 

Annuities are insurance products that can reduce the risk that you’ll outlive your retirement savings. Annuities have been around for a long time, but they have become more common recently as people are living longer, fewer people are covered by traditional pension plans, and planning for retirement has become more important. They can often be combined with other insurance products like life insurance to create complete protection for you and your family. Like the funds in an IRA, withdrawals prior to age 59 1/2 are subject to taxes and penalty. Additionally, surrender charges may apply. 

How do annuities work?

You make a payment to an insurance company, either a lump sum or a series of payments. In return, you’ll get regular income for a specified period, often for life. Functionally, you are ensuring that you won’t run out of money during retirement, which is a common concern.

What types of annuities are there?

Each insurance company has different products and different add-ons to its annuities, so there are many variations. But there are four key terms you should understand before shopping for an annuity:

Immediate or deferred: This one is fairly simple. Do you want payouts to begin now? If so, you want an immediate annuity. It can be funded with a lump sum, often from a retirement account, like a 401(k) or an IRA, and you will start receiving payments right away. If you’re a number of years from retirement, a deferred annuity allows you to save for retirement and enjoy tax-deferred growth without the contribution limits associated with many retirement accounts. . Your contributions will grow until you annuitize them and start taking payouts.

Fixed or variable growth: The funds you contribute to deferred annuities can grow over time. Usually, you can choose how they grow. With a fixed annuity, the insurance company sets a certain percentage that the account will earn every year. That growth will never change, hence it is fixed. A variable annuity1, on the other hand, is most often tied to the investment markets. The growth could be more than you would get at a fixed rate. But it is not guaranteed, and in down markets the account could lose value.

Is an annuity considered a retirement account?

No. An annuity is an insurance product that can help guarantee you’ll never run out of retirement savings. Some parts of deferred annuities work in ways similar to common retirement accounts—like growing with the market in the case of a variable annuity and having some tax advantages—but they are a product, not an account.

Differences and benefits of annuities and IRAs

It’s normal to be concerned about whether you’ve saved enough for retirement. Both IRAs and annuities can help alleviate that concern. And both can be used to build a robust retirement strategy. Understanding the differences is key to making the most of your savings and planning for the retirement you deserve. Here are a few things to keep in mind with each:

Both IRAs and annuities are long-term savings vehicles

The biggest benefit of retirement accounts like 401(k)s and IRAs is the compounding interest that grows tax free. Over many years, small contributions can grow extensively. Starting when you are young, in your 20s or 30s, is key to getting the most out of an IRA or a 401(k).

Annuities can help you now or in the future

Annuities convert existing savings into guaranteed payments. If you’re not sure that your savings will last as long as you need them to, an annuity is a good way to reduce that concern. An immediate annuity will begin payouts now, while a deferred annuity gives you time to make regular contributions (and gives you time for your contributions to grow).

Which is better—annuity or IRA?

Annuities and IRAs can both help you plan for retirement. Many people take advantage of both. What you choose will have a lot to do with your individual circumstances. If you’re at or near retirement age, an IRA may not make much sense. It’s a long-term savings vehicle, and it won’t have much time to grow. Immediate annuities, on the other hand, are often purchased at or near retirement. On the other hand, if you’re a long way from retirement, starting an IRA will be beneficial. And if you’ve contributed the maximum to your IRA and would like to put additional money toward your retirement, a deferred annuity makes sense. If you’re unsure about how to handle your future savings, a financial professional can help you get a clearer picture of where you stand. 


Explore life income options with annuities.

Our financial services professionals can walk you through the features and benefits of annuities and help you decide what is right for you.

1Variable annuities are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company. 

2Guarantees are based upon the claims-paying ability of the issuing company and does not apply to funds allocated to investments in a variable annuity.