An IRA annuity is nothing more than an annuity with special paperwork that encloses it inside an Individual Retirement Account. Like any IRA, the money will be available for you to withdraw without penalty after you retire, as long as you meet certain requirements.

Time Frame

If you have an IRA annuity and retire before you're 59 1/2, you'll pay a 10 percent penalty on lump sum distributions, on top of income taxes on the withdrawals.

Prevention/Solution

Even though there's a penalty for lump sum early distributions, if you take substantially equal payments from any IRA to the age of 59 1/2 or for 5 years, you can avoid the penalty.

Benefits

When you annuitize an annuity, it provides an income you can't outlive.

Warning

Annuities have penalties for early surrender of funds. Check to make certain kthe surrender charges won't interfere with your plans to take an income.

Features

Annuities are tax-deferred vehicles whether you have them inside an IRA or not. The difference between a non-IRA annuity and an IRA annuity is that you must begin withdrawing funds from an IRA annuity and pay income taxes on the withdrawals after you pass age 70-1/2.

Expert Insight

Although some experts feel that annuities are redundant in IRAs because of the duplication of the tax-deferred status, newer variable annuities offer the opportunity for substantial growth and guarantees that you can't get with mutual funds.

Source:

Congressional Budget Office: Legislative History of IRAs

Retire on Your Terms: Anuity Basics

What are Qualified Annuities?

More Information:

IRA Qualified Annuities

IRS Tax Topics: Pensions and Annuities