As of January 2021, individuals can use up to $135,000 of their retirement savings account (such as a 401(k) or an IRA) to buy an annuity such as a qualified longevity annuity contract (QLAC), simple fixed immediate annuity, variable annuity, or indexed annuity.
IRA/annuity pairing perks: Annuities purchased through a 401(k) can offer higher payouts. According to David Blanchett, head of research for Morningstar Investments in the Wall Street Journal in April 2019, this is because of the large pool of customers that an employer offers. Also, annuities offered through employers are typically carefully vetted with fees that are more reasonable than they might otherwise be thanks to the Employee Retirement Income Security Act (ERISA).
The gender difference worth noting: While it may seem archaic, women win when it comes to annuities. That’s because women don’t end up paying more for the same coverage. Women tend to live longer, and their life expectancy is reflected in retirement and life insurance products. On the other hand, this means that men might pay more.
IRA/annuity pairing drawbacks: By using an IRA to purchase an annuity, you are essentially using tax- deferred funds to purchase a tax-deferred annuity. So, there’s no big tax win. Also, interest rates are relatively low compared to investing in stocks or ETFs. And, if you don’t live to use an annuity, they typically can’t be left to loved ones unless you pay a bigger premium and accept a reduced payout.
The practicality difference: Once you purchase an annuity while it’s still in the accumulation phase, it’s very difficult to get your money out. So, people tend to use IRAs (money specifically put away for retirement) to buy annuities rather than other savings.
Looking forward: According to the Center for Retirement Research, workers are increasingly dependent on 401(k) plans for retirement. 401(k)s, because of the SECURE Act in 2019, can now more easily offer annuity options. Annuities are a tool that helps workers to better utilize their assets for the duration of their retirement. With all of that, one could reasonably expect interest and investment in annuities to increase in the years to come.
