Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

A New Take on Placing an Annuity in an Ira

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

A New Take on Placing an Annuity in an Ira

Article excerpt

Annuities are contracts between individuals and insurance companies that provide the purchaser with a steady stream of income during retirement. They often play a role in replacing or supplementing other fixed income streams, such as pensions and Social Security.

But many financial advisers say it makes little sense to hold an annuity in a retirement account such as a traditional or Roth IRA because it would be similar to wearing a raincoat indoors. One of the main advantages of an annuity is that your money grows tax-deferred. However, any asset - stocks, bonds and annuities - that are held in an IRA is automatically tax-deferred.

"Is it a good idea to buy an annuity within an IRA? At first blush, the answer would seem to be 'no' because one of the biggest benefits of an annuity is tax deferral, which you already have in an IRA. But it's not so simple," said Ken Nuss, CEO of AnnuityAdvantage, a national marketplace for annuities based in Medford, Ore.

"If an annuity product meets a client's needs in the best way, the fact that you are putting a tax-deferred product inside of an IRA that already provides tax deferral is irrelevant," he said.

His example is a client who needs to supplement her income with a five-year fixed-rate investment. She could choose a corporate bond paying 2.5 percent, a bank CD paying 2 percent, or a fixed annuity yielding 3 percent.

"In that example, two of the options are not tax-deferred," Mr. Nuss said. "But the tax-deferred fix annuity provides the best return for that particular client's needs."

Annuities come in different shapes and sizes. Essentially, how they work is the investor hands over a lump sum of cash to an insurance company, which invests the money and guarantees the annuity owner a stream of guaranteed lifetime income. The drawback is that once the buyer enters the contract, he cannot get his capital back and has little to no ability to change the income stream once it starts.

There are no direct fees associated with fixed-rate annuities. Variable annuities are a different story. Mr. Nuss said he does not sell variable annuity products. …

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