Can an Annuity Be Put in a Roth IRA?
Annuities have become popular because they offer many guarantees. The Roth IRA is also a popular way to invest funds, since the growth of the IRA is not only tax-sheltered but also tax-free if taken at retirement.
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Types
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There are many types of annuities. The three primary categories are fixed annuities, variable annuities and indexed annuities.
Guarantees
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Each type of annuity has its own form of guarantee. Fixed annuities are similar to bank CDs, and the principal doesn't fluctuate. Variable annuities often offer riders at a cost that guarantees not only the principal but also, in many cases, a minimum return. Indexed annuities are a mix of the fixed and the variable, with a guaranteed return and some participation in the market.
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Features
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Annuity growth is tax-deferred until you withdraw it from the annuity. At that point, tax laws dictate that the interest is the first thing you remove.
Roth IRAs
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A Roth IRA is not a product but a way to register the account that indicates its tax- deferred and tax-free status. A Roth IRA can contain any type of investment product except collectibles, such as coins or artwork.
Considerations
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An annuity is an allowable investment for a Roth IRA and is called a qualified annuity when used. Some financial planners don't recommend annuities since Roth IRAs already have tax-sheltering.
Misconceptions
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Even though there's an overlap of tax-sheltering, if the annuity offers a higher rate of return or if the variety of funds or guarantees built into the variable looks more attractive than simple mutual funds, it makes sense to invest in an annuity for the Roth. Because it is a Roth IRA, there is no tax on the growth when you take it out of the policy.
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- Photo Credit Image by Flickr.com, courtesy of Duncan Rawlinson
