Roth IRA Vs. Variable Annuity


Both the Roth IRA and the variable annuity are widely used retirement account types, each with its own pros and cons. There are some important differences between the two, and understanding these differences can lead to an informed and educated decision about how and where to best invest your hard-earned retirement dollars.


Both the Roth IRA and the variable annuity are designed to provide you with an outlet for saving for your retirement. Regardless of whether you invest your retirement money in a Roth IRA or a variable annuity, both have features that allow your money to grow without taxes due on the growth of your principal. Both the Roth IRA and the variable annuity can result in significant growth of your retirement money.

Time Frame

Regardless of whether your retirement money is invested in a variable annuity or a Roth IRA, certain penalties exist for withdrawals prior to age 59 1/2. Such withdrawals, under most circumstances, are considered ineligible and will result in an increase in your taxable earnings for that year, as well as a mandatory IRS penalty of 10 percent. One significant difference between a Roth IRA and a variable annuity is the fact that the annuity may have its own surrender fees that are above and beyond those penalties imposed by the government for early withdrawal of retirement savings. Annuity surrender fees can be steep and dramatically reduce the overall account value in the event of an early distribution.


The Roth IRA allows for retirement money to accumulate without income taxes due on the growth of the principal and also permits entirely tax-free withdrawals if they are taken after the account owner is 59 1/2. The variable annuity also accumulates earnings without taxes due on the growth but typically does not allow for completely tax-free distributions.


The Roth IRA’s tax-free withdrawal feature is extremely attractive to investors who envision a life without income taxes after they retire. By paying the taxes on contributions in the current year, you are granted a completely free distribution later in life. For those investors who worry about tax rates in the future, the Roth IRA address much of this concern. On the contrary, investors whose retirement assets are within a variable annuity may not enjoy the luxury of a tax-free distribution from their retirement account. In most cases, only the actual dollar amount of the initial contribution is permitted to be withdrawn tax-free, while the growth of that money is taxed at the owner’s ordinary income tax rate.


If you are concerned that your income tax bracket may be higher when you retire, the Roth IRA is a retirement account type that you should consider. In exchange for paying the income taxes due now on money that you earmark for use in the future, the government allows that account to accumulate without income taxes due on the growth and gives you entirely tax-free withdrawals at a later date. If you are not concerned with income taxes, but instead want to invest your money into the stock market while still enjoying some of the added features that an insurance company can provide, a variable annuity may be exactly what you are looking for.

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