How Does An IRA Annuity Work? | Taxes, Payouts, Trade-Offs

An IRA annuity is an annuity contract held inside an IRA, so earnings stay tax-deferred (or tax-free in Roth) until you take money out.

Annuities get pitched as “retirement income,” while IRAs get pitched as “retirement accounts.” Put them together and it can feel like two products stacked on top of each other. The clean reality is simpler: your IRA is the legal container, and the annuity is the insurance contract sitting inside it.

If you’re weighing an IRA annuity, you’re usually trying to answer three things: what it pays, what it costs, and which rules can trap you later.

What An IRA Annuity Is And What It Is Not

An IRA annuity is not a special “annuity IRA” that replaces normal IRA rules. It’s a traditional or Roth IRA that owns an annuity contract. The IRA custodian keeps the account, and the insurance company issues the contract as an IRA asset.

This matters because the IRS rules for IRAs still control contributions, rollovers, withdrawals, and reporting. The contract can add its own limits, like surrender charges. It can’t erase IRS deadlines.

Why People Buy One

• Planned income. You can turn part of an IRA balance into scheduled payments.
• Guardrails. A contract can make spending steadier when self-managed withdrawals feel stressful.
• Contract features. Riders can add income features or death benefits, for a fee.

What It Doesn’t Add Inside An IRA

Inside a traditional IRA, you already have tax deferral. So “tax-deferred growth” isn’t the reason to buy an annuity here. The reason is the contract features: income design, guarantees, and risk limits.

How Does An IRA Annuity Work? From Day One To Payday

Most IRA annuities follow a two-stage pattern: an accumulation stage, then an income stage. Some contracts stay in accumulation and just let you withdraw on your own schedule.

Stage 1: Funding And Accumulation

1. Open an IRA (traditional or Roth) with a custodian that can hold annuities.
2. Move money in via contribution, rollover, or trustee-to-trustee transfer.
3. The IRA buys the annuity and you choose options like term, crediting method, and riders.
4. The contract grows under its rules (set rate, index formula, or market subaccounts).

Stage 2: Taking Money Out

You can usually take money out in one of three ways:

• Withdrawals. You pull cash value as needed, within contract limits.
• Scheduled withdrawals. You set a paycheck-like amount while keeping cash value accessible.
• Annuitization. You convert the contract into a stream of payments based on a payout option.

Once you start distributions, the IRA rules lead. The contract rules decide how easy it is to get cash, and what penalties apply under the contract.

Common IRA Annuity Types And What Changes Inside An IRA

You can hold many annuity designs inside an IRA. The difference is that IRA distribution rules still apply, and most payouts from a traditional IRA are taxed as ordinary income.

Fixed And Fixed Indexed Annuities

A fixed annuity credits a stated rate. A fixed indexed annuity credits interest tied to an index formula with caps or spreads.

Variable Annuities And RILAs

A variable annuity invests in subaccounts that can go up and down with markets. A registered index-linked annuity (RILA) ties returns to an index with a downside buffer or floor and a cap on gains. Both can add cost and complexity. FINRA’s overview is useful for understanding fees, surrender periods, and market risk: FINRA on annuities.

Immediate And Deferred Income Annuities

An immediate income annuity (often called a SPIA) starts payments soon after purchase. A deferred income annuity starts later.

QLAC Inside An IRA

A qualified longevity annuity contract (QLAC) is a form of deferred income annuity that can be bought inside certain retirement accounts. It can reduce the IRA balance used to compute RMDs until payouts begin, within IRS limits.

Funding Rules: Contribution, Rollover, Transfer

Funding is where people accidentally create taxes. Stick to clean paths that keep the money inside retirement accounts.

Regular IRA Contributions

Contributions require earned income and have annual limits. The IRS keeps the current limits and age rules on its retirement topics page: IRS IRA contribution limits.

Direct Rollover From A Workplace Plan

A direct rollover keeps the check payable to the IRA custodian, not to you. That avoids mandatory withholding and reduces the chance you miss the 60-day redeposit window.

Trustee-To-Trustee IRA Transfer

This is often the smoothest move when you already have an IRA. Your old custodian sends funds straight to the new custodian. You don’t touch the cash, so you avoid accidental taxable distributions.

Taxes And Penalties Inside An IRA Annuity

The tax rules depend on the IRA type, not the annuity type.

Traditional IRA Annuity Taxes

Traditional IRA distributions are usually taxable as ordinary income. The IRS reference for IRA distributions, rollovers, and exceptions is Pub. 590-B: IRS Publication 590-B.

Roth IRA Annuity Taxes

Qualified Roth IRA distributions can be tax-free. Nonqualified distributions can be partly taxable and may trigger a 10% additional tax. The ordering rules for Roth distributions (contributions, conversions, earnings) still apply inside a Roth IRA that holds an annuity.

Early Distributions

If you take a taxable distribution before age 59½, a 10% additional tax may apply unless an exception fits. Don’t rely on old blog posts. Use the current IRS text when planning withdrawals.

Contract Costs: Where People Get Surprised

Find these cost buckets before you sign.

Surrender Charges

Many deferred annuities have surrender charges for withdrawals above a yearly “free” amount during the surrender period. That charge is a contract fee. It’s separate from any IRS penalty or income tax.

Ongoing Fees

Variable annuities may stack mortality and expense charges, administrative fees, subaccount expenses, and rider costs. Fixed and indexed annuities can look cheaper on paper, yet caps and spreads can act like an indirect cost by limiting credited interest.

Riders And Benefit Bases

Income riders often track a “benefit base” used to calculate rider withdrawals. That number is often not the cash value you can withdraw.

Table: IRA Annuity Types At A Glance

Type Inside An IRA	What You Get	What To Check
Fixed Deferred	Stated interest rate for a term	Surrender schedule; renewal rate after the term
Fixed Indexed	Index-linked crediting with caps/spreads	Crediting method; cap resets; long surrender period
Variable	Subaccount investing with optional riders	Layered fees; market losses; rider rules
RILA	Index-linked returns with a buffer or floor	Downside still possible; cap; term rules
Immediate Income (SPIA)	Payments starting soon after purchase	Little liquidity after start; option choice matters
Deferred Income	Payments starting on a chosen date	Access limits before payouts; start date rules
QLAC	Deferred income with special RMD treatment	IRS limits; payout start rules; limited access

Payout Options: How The Checks Are Shaped

Annuities give you more payout “shapes” than a plain IRA withdrawal plan. The shape you choose affects flexibility and what happens at death.

Life-Only

Payments last as long as you live. Monthly income is often higher, yet payments stop at death.

Period Certain Or Refund Features

These options can leave payments to a beneficiary for a set term, or refund unused purchase payment in a defined way. Expect a lower monthly check than a pure life-only option.

Income Rider Withdrawals

Some contracts let you take a rider withdrawal amount each year while the contract remains in force. This can keep more access to cash value than annuitization, yet the rules can be strict.

RMD Rules: Where IRA Law Meets Contract Rules

Traditional IRAs must start required minimum distributions (RMDs) once you hit the required beginning age. The IRS explains the timing and the first-year April 1 deadline option on its RMD FAQ page: IRS RMD deadlines and timing.

With an IRA annuity, you still must meet the RMD for the IRA each year. The contract can make that easy or awkward.

If You’re Still In Accumulation

You may take a distribution from the annuity’s cash value. If surrender rules make that costly, some people keep separate IRA assets for RMD flexibility.

If You’re In An Income Phase

Some income streams can satisfy RMD needs because the payments are distributions. Still, a payment pattern can overshoot the minimum, which can raise taxable income in that year.

Table: RMD Fit By Payment Style In A Traditional IRA

Payment Style	What You Control	RMD Fit
Ad hoc withdrawals	Timing and amount	You track the RMD and withdraw at least that amount
Scheduled withdrawals (not annuitized)	Amount can be adjusted	Totals can satisfy RMD if they meet the yearly minimum
Annuitized payments	Low control after start	May satisfy RMD, yet can force higher taxable income
Income rider withdrawals	Rule-bound withdrawal amount	Counts toward RMD, yet rider limits can clash with rising RMDs

Inherited IRA Deadlines Still Apply To The Annuity

If the IRA owner dies, beneficiary distribution rules still apply to the annuity held in the IRA. Pub. 590-B describes the 10-year rule for many non-spouse heirs after law changes that started with deaths in 2020.

How To Evaluate An IRA Annuity Before You Sign

Use contract pages, not verbal claims, to answer these questions.

1) What Problem Is This Solving?

Income floor? Lower volatility? A planned start date for checks? If you can’t name the problem, it’s hard to judge the price.

2) What Are The Exit Terms?

Get the surrender charge schedule, the free-withdrawal amount, and any market value adjustment terms in writing.

3) What Fees Will I Pay Each Year?

Ask for a one-page list of fees, including rider costs.

4) What Happens If I Die Early?

Confirm what goes to beneficiaries: cash value, refund options, remaining period-certain payments, or nothing in a life-only setup.

Clean Purchase Checklist For An IRA Annuity

• Choose the role: income, risk limits, or a set payout start date.
• Pick the IRA type: traditional or Roth.
• Use a direct rollover or trustee transfer for funding when possible.
• Read surrender charges and free-withdrawal terms before you pick riders.
• Keep some liquid IRA assets outside the annuity for RMD timing and surprise bills.
• Make sure IRA and contract beneficiary forms match your intent.

If you treat an IRA annuity like a long-term contract, it can bring clarity to income planning. Treat it like a swap-friendly investment and it can bite you through fees and exit rules.