A Look at Individual Retirement Annuities

Written by Hersh Stern Updated Tuesday, December 17, 2024

Individual retirement annuity contracts are tax-deferred or pre-tax personal retirement plans that can provide future financial security for your clients. Let’s take a look at some of their advantages.

Individual retirement annuity contracts are designed to provide the annuitant with financial security throughout his or her retirement, with money in a fixed or variable annuity offered by the insurance company who acts as its custodian.

The contributions and deductibility rules to an individual retirement annuity are basically the same as the ones that apply to traditional IRAs. Individual retirement annuity plans are covered by the annual investment caps for IRAs (except rollovers) and the withdrawal age prerequisite that starts at age 70½ years.

Individual retirement annuities provide several advantages that may interest your clients:

• It can be created and funded without requiring employer participation
• Its interest rate is competitive
• Taxes on contributions and earnings are deferred until retirement
• The funds are always available

Annuitants who are not eligible for an employer-sponsored retirement plans or with income that falls below current ceiling for deductibility may also avail of tax deduction on the contribution amount.

An individual retirement annuity can only be issued in the name of the owner, however spousal individual retirement annuities can be created. Both individual and spousal retirement accounts have the same deductibility rules.

If the annuitant’s spouse is not covered by a retirement plan, the individual retirement annuity contribution is fully deductible. A limited contribution deduction applies in case the spouse is covered by a retirement plan.

While contributions to individual retirement plans are also flexible with no required minimum amount, annuitants cannot exceed the maximum annual IRS-allowed contribution cap.

Currently, the maximum contribution an annuitant can contribute to his or her plan is the taxable compensation for the year, $4,000 (this contribution cap will remain enforced until 2007) and $5,000 (for 2008), whichever is smaller. However, annuitants over 50 years are allowed to contribute an additional $1,000 as catch-up contributions.

Individual retirement annuity plans have other limitations, which include the following:

• The annuitant’s interest in the contract should be fully vested (non-forfeitable) unless the forfeiture is part of a criminal proceeding.
• The annuitant cannot transfer any portion of the plan to any person other than the insurance company that issued the contract.
• The entire interest of the annuitant must be distributed to the annuitant.
• Only the annuitant or his/her surviving named beneficiaries can receive the benefits or payments.

Individual retirement annuity contracts cannot be used as loan collateral. Doing so will disqualify them as individual retirement annuity beginning the first day of the tax year the contract was used as a loan collateral. Once a contract loses its individual retirement contract status, it becomes taxable and its fair market value will be is considered distributable.

I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.

Dr. David Babbel Professor Wharton School

Read 650+ verified reviews

The individual retirement annuity can be set up by buying an annuity contract or an endowment contract from a life insurance company. All endowment contracts issued prior to November 6, 1978 can qualify as individual retirement annuities. When an endowment contract is involved, deductions for amounts paid under the contract that can be allocated to life insurance are not allowed.

Like any other investment products individual retirement annuity plans suits some clients but not others. If you have clients who stand to gain from individual retirement annuity, there is one more important thing they should know: the sooner they begin, the bigger their rewards.