Yes, you can put an IRA into an annuity, and it’s a strategy that more retirees are considering as they look for ways to generate guaranteed income. The process is straightforward in concept: you roll over or transfer your IRA funds into an annuity contract held within a tax-advantaged account.
But the details matter, and getting them wrong can trigger taxes and penalties you didn’t plan for.
Key Takeaways
- You can roll over a traditional IRA into an annuity tax-free if you follow IRS transfer rules.
- Roth IRA funds can also fund an annuity, and qualified withdrawals remain tax-free.
- Once money is inside an annuity, growth is tax-deferred, but annuities inside IRAs don’t provide additional tax benefits beyond what the IRA already offers.
What It Means to Put an IRA Into an Annuity
When people talk about putting an IRA into an annuity, they’re typically describing one of two things: a direct rollover of IRA funds into an annuity contract, or purchasing an annuity using existing IRA assets. The annuity becomes an investment vehicle held inside the IRA, which means the tax treatment of the IRA governs the account.
With a traditional IRA-funded annuity, contributions were made pre-tax, so withdrawals in retirement are taxed as ordinary income. With a Roth IRA-funded annuity, contributions were made after-tax, so qualified withdrawals are tax-free. The annuity itself doesn’t change those rules.
How the Transfer Works
There are two main ways to move IRA money into an annuity:
- Direct transfer (trustee-to-trustee): Your IRA custodian sends funds directly to the insurance company. You never touch the money, so there’s no withholding and no 60-day deadline to worry about.
- 60-day rollover: You receive a distribution from your IRA and have 60 days to deposit it into the annuity. Miss that window and the IRS treats it as a taxable distribution, potentially with a 10% early withdrawal penalty if you’re under age 59½.
The direct transfer is almost always cleaner. The 60-day rollover introduces risk, and you’re limited to one per 12-month period under IRS rules.
Types of Annuities Used With IRAs
Not all annuities are the same, and the type you choose affects how your money grows and how income is paid out.
Fixed Annuities
A fixed annuity pays a guaranteed interest rate for a set period. It’s the most predictable option and works similarly to a CD, except it’s held inside an insurance contract. Rates vary by insurer and term but have generally been more attractive since 2022 as interest rates rose.
Variable Annuities
A variable annuity lets you invest in sub-accounts that function like mutual funds. Returns aren’t guaranteed and depend on market performance. Variable annuities often carry higher fees than other options, including mortality and expense charges that can run 1% to 1.5% annually or more.
Fixed Indexed Annuities
A fixed indexed annuity (FIA) ties your returns to a market index like the S&P 500, but with a floor that prevents losses. Gains are typically capped or limited by a participation rate. This type has grown popular among pre-retirees who want some market upside without full downside exposure.
Immediate and Deferred Income Annuities
These annuities convert your lump sum into a stream of income payments. An immediate annuity starts payments within a month or so of funding. A deferred income annuity (sometimes called a longevity annuity) delays payments until a future date, often age 80 or 85, in exchange for a higher payout rate.
The Double Tax-Deferral Question
One thing financial advisors regularly flag: putting an annuity inside an IRA means you’re layering a tax-deferred product inside an already tax-deferred account. The IRS allows it, but the annuity doesn’t add any extra tax benefit on top of what the IRA already provides. You’re paying for the insurance features of the annuity, not for additional tax advantages.
That doesn’t necessarily make it a bad idea. Guaranteed income, downside protection, and death benefit riders can all be worth paying for depending on your situation. But if the main selling point you’re being offered is tax deferral, that argument doesn’t hold up inside an IRA.
Required Minimum Distributions (RMDs)
If your annuity is inside a traditional IRA, RMD rules still apply. Starting at age 73 (under the SECURE 2.0 Act signed into law in December 2022), you must take minimum distributions each year. Some annuity contracts are designed to satisfy RMDs automatically, but you need to confirm this with the insurance company before assuming it works that way.
Roth IRAs have no RMD requirement during the owner’s lifetime, so a Roth IRA-funded annuity avoids that complication entirely.
One specific option worth knowing: a Qualifying Longevity Annuity Contract (QLAC) lets you use up to $200,000 (indexed for inflation) of your IRA balance to purchase a deferred income annuity that starts no later than age 85. QLAC funds are excluded from RMD calculations until payments begin, which can reduce your required distributions during early retirement years.
Costs and Surrender Charges
Annuities typically come with surrender periods, often 5 to 10 years, during which you’ll pay a fee to access your principal. Surrender charges usually start high (around 7% to 10%) and decrease each year until the period ends.
Before moving IRA money into an annuity, review:
- The surrender charge schedule and how long it lasts
- Annual fees, including administrative fees, mortality and expense charges, and rider costs
- Whether the annuity allows free withdrawals each year (many contracts allow 10% annually without surrender charges)
- How the annuity handles RMDs if applicable
When It Makes Sense
A few situations where this approach tends to work well:
- You want guaranteed lifetime income and Social Security alone won’t cover your essential expenses
- You’re concerned about sequence-of-returns risk in early retirement and want a portion of assets protected from market losses
- You have a large IRA and want to reduce future RMDs using a QLAC
- You’re in good health and expect a long retirement, making a lifetime income stream more valuable
It tends to make less sense if you have significant liquidity needs in the near term, are already in poor health, or don’t want to pay the higher fees that many annuity products carry.
Conclusion
Rolling an IRA into an annuity is a legitimate retirement planning move, but it requires comparing the cost of the annuity against the value of what you’re getting. Talk to a fee-only financial advisor before committing, especially if the annuity has a long surrender period or high annual fees.