How to Open an IRA Annuity

What an IRA Annuity Is and How to Get One

An IRA annuity is an annuity contract held inside an Individual Retirement Account. You buy it the same way you would buy any annuity — through an insurance company or brokerage — but the money goes into an IRA wrapper instead of a taxable account. The main reason to do this is tax deferral: the annuity grows without triggering capital gains taxes each year, and you do not pay income tax on the earnings until you withdraw money in retirement.

To get an IRA annuity, you open an IRA (if you do not have one), fund it with money you are allowed to contribute that year, then use that money to purchase an annuity contract from an insurance company. The process takes a few days to a few weeks depending on the provider and how quickly you move through the paperwork.

The catch is that annuities inside IRAs come with the same withdrawal rules as regular IRAs: you cannot touch the money penalty-free before age 59½, and you must start taking withdrawals at age 73 (as of 2023). The annuity contract itself may also have its own surrender period — a window during which you pay a fee if you withdraw early — which stacks on top of the IRA rules.

Key Takeaways

• You must open an IRA first, then use IRA funds to buy an annuity from an insurance company or brokerage.
• You can only contribute money you earned as income that year, up to the annual IRA contribution limit (which varies by age and income).
• An IRA annuity grows tax-deferred, but you still cannot withdraw before 59½ without a 10% penalty, and you must start withdrawals at 73.
• The annuity contract may have its own surrender charges on top of IRA withdrawal rules, so read the contract before you buy.
• You can hold an IRA annuity at a brokerage, insurance company, or bank — whichever sells the annuity product you want.

Opening an IRA if You Do Not Have One

If you already have an IRA, skip to the next section. If not, you need to open one before you can buy an annuity inside it. You can open an IRA at a bank, brokerage, or insurance company — the same place where you plan to buy the annuity, or somewhere else entirely.

To open an IRA, you will need to provide your Social Security number, date of birth, address, and employment information. The institution will ask whether you want a Traditional IRA (contributions may be tax-deductible, withdrawals are taxed as income) or a Roth IRA (contributions are not deductible, but may have access to withdrawals are tax-free). This choice affects how the annuity is taxed later, so think about whether you expect to be in a higher or lower tax bracket in retirement.

Opening an IRA takes 10 to 20 minutes online or over the phone. The institution will send you a confirmation and account number. You do not have to fund it right away, but you will need to deposit money before you can buy the annuity.

Funding Your IRA with Money You Can Contribute

You can only put money into an IRA if you earned income that year. The IRS calls this earned income — wages, salary, self-employment income, or taxable alimony. You cannot fund an IRA with investment returns, inheritance, gifts, or unemployment benefits.

The amount you can contribute each year depends on your age and income. For 2024, the limit is $7,000 if you are under 50, or $8,000 if you are 50 or older. If you earned less than that, you can only contribute what you earned. For example, if you made $4,000 in freelance income, you can contribute up to $4,000 to an IRA that year, not the full $7,000.

You have until the tax filing important date of the following year (usually April 15) to make a contribution for the previous year. So you can contribute to your 2024 IRA until April 15, 2025. Once the money is in the IRA, you can use it to buy an annuity whenever you are ready.

Choosing and Buying an Annuity Contract

Once your IRA is funded, you tell the institution to use the money to purchase an annuity. The institution will give you a list of annuity products it offers, or you can shop around at other providers. Common types include fixed annuities (your payment is may provide and does not change), variable annuities (your payment depends on how underlying investments perform), and indexed annuities (your return is tied to a stock market index, with a floor and ceiling).

Read the annuity contract — called a prospectus for variable annuities — before you buy. Pay attention to the surrender period, which is how long you must hold the annuity before you can withdraw without a penalty. Surrender periods typically run 5 to 10 years. If you withdraw during this window, you pay a surrender charge, usually a percentage of the withdrawal amount. This is separate from the 10% early withdrawal penalty the IRA itself imposes if you withdraw before 59½.

Once you have chosen an annuity, the institution will process the purchase. The insurance company will issue a contract, and the money will be locked in. This usually takes 3 to 7 business days.

Understanding the Tax Treatment of Your IRA Annuity

The tax treatment depends on whether you opened a Traditional IRA or a Roth IRA. In a Traditional IRA annuity, the money grows without annual tax, and you pay income tax on withdrawals in retirement. In a Roth IRA annuity, the money grows tax-free, and may have access to withdrawals in retirement are also tax-free.

Either way, you do not pay capital gains tax or dividend tax on the annuity's earnings while the money is inside the IRA. That is the main tax advantage. However, you still cannot withdraw before 59½ without a 10% penalty on the earnings portion (the contribution itself can usually be withdrawn penalty-free from a Roth, but not from a Traditional IRA).

At age 73, you must start taking Required Minimum Distributions (RMDs) from a Traditional IRA annuity. The IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the full amount, you pay a 25% penalty on the shortfall (reduced to 10% if you correct it within two years). Roth IRAs do not require RMDs during the account holder's lifetime.

What Happens When You Need to Withdraw Money

If you need to withdraw money before retirement, you will face penalties. A withdrawal before 59½ triggers a 10% early withdrawal penalty on the earnings (not the contributions in a Roth). On top of that, if you are still in the annuity's surrender period, you pay a surrender charge — often 5% to 10% of the withdrawal amount, depending on how many years are left in the period.

Some annuities allow a small annual withdrawal without surrender charges — often called a free withdrawal amount, typically 10% of the contract value per year. Check your contract to see if yours has this feature. If you have a genuine hardship, some IRAs allow penalty-free withdrawals for things like medical expenses or first-time home purchase, but the annuity's surrender charge may still explore.

Once you reach 59½, you can withdraw without the 10% IRA penalty, but the surrender charge still applies if you are in the surrender period. After the surrender period ends, you can withdraw freely, though you will owe income tax on the earnings (in a Traditional IRA) or nothing (in a Roth IRA).

Where to Buy an IRA Annuity

You can buy an IRA annuity at most major financial institutions. Insurance companies like Fidelity, Vanguard, Schwab, and Equitable sell annuities directly. Banks and brokerages also offer them. Shop around, because annuity fees, features, and payout rates vary widely.

When comparing, look at the annual expense ratio (how much the annuity costs per year as a percentage of your balance), the surrender period length, any free withdrawal amounts, and the payout rate if it is an when ready annuity. Ask whether the company is licensed to sell annuities in your state — most are, but it is worth confirming.

You do not have to buy the annuity from the same place where you opened the IRA. You can open an IRA at one institution and then move the money to another to buy an annuity there. This is called a trustee-to-trustee transfer and does not count as a withdrawal, so there are no tax consequences.

Frequently Asked Questions

Can I move money from a regular IRA into an IRA annuity?

Yes. If you already have a Traditional or Roth IRA with money in it, you can use that money to buy an annuity. This is not a new contribution — it is just moving the money from one investment to another within the same IRA. There are no tax consequences as long as you do not withdraw the money to your personal account first.

What if I change my mind after buying an IRA annuity?

Most annuities have a free-look period, usually 10 to 30 days, during which you can return the contract and get your money back. After that, you are locked in for the surrender period. If you withdraw early, you pay surrender charges. Once the surrender period ends, you can withdraw or exchange the annuity without penalty (though you will owe taxes on earnings in a Traditional IRA).

Can I have both an IRA annuity and other investments in the same IRA?

Yes. An IRA can hold multiple investments — annuities, stocks, bonds, mutual funds, and more. You can split your IRA contribution between an annuity and other investments, or move money between them. Just remember that the total amount across all investments cannot exceed the annual contribution limit.

Do I have to buy an when ready annuity or can I buy a deferred annuity?

You can buy either. A deferred annuity grows for years before you start taking payments, while an when ready annuity starts paying you right away. Deferred annuities are more common in IRAs because they let the money grow tax-deferred for longer. when ready annuities make sense if you are already retired and want income now.

What happens to my IRA annuity if I die?

If you die before the annuity starts paying, your beneficiary receives the remaining balance, usually as a lump sum or over a period you chose when you bought the contract. If the annuity is already paying out, the payments may stop or continue to your beneficiary depending on the payout option you selected. Check your contract to see what happens to your beneficiary.