Why would someone want to put an annuity inside an IRA?

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Q. Annuities are one of the highest commission products out there. Can you give me any reason why anyone should put an annuity inside an IRA?
— Investor

A. When we look at financial products, what may be a good investment option for you may not be for someone else.

There are some products you may not want to put inside of an IRA because an IRA already has tax-deferral.

For example, there would be no benefit to putting a municipal bond inside of an IRA because there is no added benefit, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

“Generally, you get a lower interest rate on a muni due to a tax-free status,” she said.

But if you are risk averse, an annuity may be attractive, she said.

“An guarantees you a higher rate or return, income for life and other possible options,” she said. Compare that to a CD, she said, and she would pick the annuity.

She said annuities can get a bad rap because commissions can be high and if 100% of the commission is paid up front, the annuity may be underserviced because the seller has no incentive to service the annuity.

“If it is a levelized commission, meaning the agent gets paid over the life of the annuity, then there is an incentive to service it, especially if this can be transferred to another agent,” Kane said.

She said you should always ask an advisor how they will be paid, and if you choose another advisor, how that advisor will be paid.

Kane said for a person who wants and likes guarantees, annuities provide a valuable benefit. Annuities provide income for life and for someone who wants that certainty, this can be a good investment option, she said.

The guarantees do come with trade-off in the form of higher fees and commissions, she said. You may also have to pay additional fees to surrender or get out of the annuity if you don’t want it anymore.

“An annuity invested in an IRA provides tax deferred growth and a guaranteed income stream. There is no extra cost for the tax deferral,” she said. “For most people, Social Security is the only guaranteed income that they have in retirement. Pensions aren’t as common these days.”

She said one strategy to create a guaranteed income in retirement is to roll over some or all your 401(k) into an IRA and then invest it in an annuity. This is a way of creating your own guaranteed income stream or a personal pension, she said.

If your only assets are in retirement accounts and you decide you want an annuity, your only option would be to have it inside the IRA.

She said critics of putting an annuity inside an IRA can say that it’s redundant because you are putting a tax deferred investment inside another tax deferred investment. They ask why someone should pay the higher cost of investing in an annuity when you can get tax deferred benefits in an IRA which will most likely have lower fees.

“This is true, but if your objective is to have tax deferred growth and to have a fixed lifetime income stream, an annuity could be a very good option for you,” she said. “As with any investment in your portfolio, it is important to start with your objectives and then find a solution to meet your needs.”

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This story was originally published on Dec. 11, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.