What is the difference between an annuity and an IRA?

An IRA and an annuity are not the same

IRAs and annuities can help you prepare for retirement, but it’s important to know that they go about it in very different ways. While an IRA is a savings account that helps you set aside money for retirement, an annuity is an insurance product that is primarily designed to convert some of your hard-earned savings into a steady stream of retirement income.

What is an IRA?

As the name suggests, an individual retirement account (IRA) is a tax-advantaged account that is specifically designed to help you save for retirement. Since any money invested in an IRA receives special tax treatment, these accounts have the potential to grow faster than they would in a fully taxable environment.

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 the I investments that you make and helps protect them from taxes. Often, these investments can be made up of stocks, bonds, or mutual funds. Each year, the IRS determines how much you can invest into an IRA account (in 2025, the maximum amount is $7,000—or $8,000 if you’re age 50 or older).¹ As a result, IRA investments can add up significantly over time.

Where can you get an IRA?

You can set up an IRA at a bank, credit union, life insurance company, brokerage firm—or almost any financial institution. In most cases, you can open an account in person, online, and even over the phone.

Traditional vs. Roth IRAs

There are two main types of IRAs, and each works a little differently. With a traditional IRA, you may be eligible to put money into the account pre-tax which means that your annual contributions can be deducted at tax time—even if you are not itemizing. Any money in the account will continue to grow tax deferred until you withdraw it in retirement. Once you start using the money, however, your withdrawals will be taxed as ordinary income. With a Roth IRA, contributions are made on a post-tax basis—which means they cannot be deducted from your taxable income. Like a traditional IRA, your money will grow tax deferred over time, but in this case any withdrawals you make in retirement will be completely tax free (if you are 59½ or older and it has been at least five years since you first contributed to your Roth IRA).

So, which is better: a Roth or traditional IRA?

While both have their advantages, it really depends on your situation. One factor that you’ll want to consider is where you most need the tax deduction. If you expect to be in a lower tax bracket in retirement, a traditional IRA may work best. If, however, you believe that your tax bracket will be the same—or higher—in retirement, you may want to consider a Roth IRA. Naturally, there are several other factors to consider, so be sure to consult with a tax expert or financial professional before making a final decision.

Is an IRA considered an annuity?

No. IRAs are retirement savings accounts. Annuities are insurance products. They work in completely different ways. You can, however, use tax-qualified IRA funds to purchase an annuity if you’d like to give yourself an additional source of income in retirement. In fact, this is a fairly common practice among retirees.

What are annuities? 

Annuities are long-term insurance products that deliver a steady stream of income in retirement. Since these income payments are often guaranteed for life,² annuities are an effective way to reduce the risk of outliving your retirement savings. 

How do annuities work?

In short, an annuity is a way to turn some of your hard-earned savings into retirement income. You can purchase an annuity with a single, lump-sum payment or by making a series of payments over time. In exchange, the insurance company will send you monthly income payments (in most cases) that you can use throughout retirement, or for a specific amount of time.

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 a few 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—on tax-deferred basis—without the contribution limits associated with many retirement accounts. Your contributions will accumulate until you annuitize them and start taking payouts.

Fixed or variable: If you select a deferred annuity, you will have to choose between a fixed or variable product. With a fixed annuity, the amount your annuity will earn each year is guaranteed (or fixed) so you know exactly what you are getting. A variable annuity,³ on the other hand, allows you to invest your principal and gain some market exposure. While your returns may be greater, it’s important to remember that growth is not guaranteed, and the account could lose value.

Indexed: Indexed annuities also allow you to invest your principal, but in this case the rates are linked are to a specific market index like the S&P 500, though the investor is not investing directly in the index. Another major difference is that these products typically limit your gains and losses so it’s important to know that you will be trading some growth potential for a fixed return and some protection on the downside.

Given the wide variety of annuities, and companies offering them, it’s important to make sure you weigh all your options carefully. That’s why it’s so important to consult a financial professional who can answer all your questions and help you sort through all the information.

Is an annuity considered a retirement account?

While the simple answer is no—there is such a thing as an individual retirement annuity (sometimes called a qualified annuity) because it is funded with pre-tax dollars (usually taken from an IRA). Since most annuities are funded with after-tax dollars, whenever we refer to an annuity in this article, we are generally describing non-qualified products.

Differences and benefits of annuities and IRAs

While an IRA is a retirement account designed for wealth accumulation, an annuity is a contract between you and the insurer that helps transform the wealth you’ve accumulated into retirement income payments. Here are a few things to keep in mind with each:

Both IRAs and annuities offer tax-deferred growth

The biggest benefit of retirement accounts like 401(k)s and IRAs is that the money you contribute has the potential to grow tax-deferred over time. You can get tax-deferred growth from annuities as well—but only if you select either a fixed deferred or variable deferred product.⁴

Annuities can help you now or in the future

Annuities convert existing savings into guaranteed income payments. If you’re not sure that your savings will last as long as needed, an annuity is a good way to reduce that concern. An immediate annuity will start sending you money right away, while a deferred annuity will begin payouts at a predetermined date in the future.

Can you own an annuity inside an IRA?

Yes, you can have an annuity inside both a traditional and Roth IRA—and there are some circumstances when it can make sense. Just know, however, that there are no additional tax benefits for doing it that way. 

Annuities and IRA’s each have their special purposes

Many people use both annuities and IRAs to prepare for retirement, but it depends on your individual circumstances. For example: If you’re at or near retirement age, an IRA may not make much sense because your money won’t have much time to grow. On the other hand, immediate annuities are often purchased at or near retirement because they can help make the money you’ve save last longer. 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. 

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¹“401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.” IRS.gov https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

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

³Variable annuities are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company.

⁴Withdrawals from an annuity prior to age 59 ½ may be subject to ordinary income tax and a tax penalty.