Annuities within IRAs are commonly referred to as "IRA annuities," but there's no difference in the features of these products and those of non-IRA annuities.
Annuities Defined
Annuities are retirement investments managed and maintained by life insurance companies. Money deposited into an annuity accumulates without income tax liability until it is withdrawn.
Several types of annuities are available to suit the needs, financial capabilities and goals of different investors. Many annuities also contain various life insurance components and other features that may benefit both the owner and his family.
Qualified Annuities
Annuities purchased within IRAs are referred to as "qualified," which simply means your contributions and withdrawals fall under Internal Revenue Service guidelines for individual retirement accounts.
Deposits create income tax deductions, but limitations exist for how much money may be deposited into IRAs, including qualified annuities; as of 2012, you may contribute only the smaller of $5,000 or 100 percent of your taxable earnings for the year. If you are over age 60, an additional $1,000 catch-up contribution is allowed.
Money must remain in the account until you are at least 59 1/2 years old. Otherwise a 10 percent early withdrawal penalty may be assessed.
Distributions
Distributions from qualified annuities cannot begin until you reach age 59 1/2. Money withdrawn increases your taxable earnings for the year. Qualified annuity withdrawals are taxed at ordinary income tax rates because the money has been accumulating tax-deferred since it was originally deposited.
Annuity owners may choose to systematically withdraw their money on a monthly or yearly basis, or close the account and take a single lump sum distribution.
Early Withdrawals
In exchange for the income tax deductions and tax-deferred accumulation resulting from contributions into qualified annuities, the IRS requires that the money remains in the account until you reach age 59 1/2. Withdrawing money before this point typically results in a 10 percent penalty.
A few exceptions exist allowing for early withdrawals without penalties: purchasing your first home, permanent disability, qualified higher education expenses and medical bills in excess of 7.5 percent of your adjusted gross income.
References
IRS.gov: IRA Contribution Limits
AnnuityAdvantage.com: Understanding IRA Distribution Rules
AnnuityNews.net: Qualified & Non-Qualified Annuities are Taxed Differently
Resources (Further Reading)
Securities and Exchange Commission: Variable Annuities -- What You Should Know
This article is a Twisted Nonsense Exclusive! (09/07/2012)
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