An annuity is an investment vehicle with tax-deferred growth. You only pay taxes on the growth when you remove the funds. A Roth IRA is a retirement plan that uses various investments for funding. The money grows tax-free, and you never pay taxes on the growth if you leave it in past the age of 59 1/2. An annuity can be a Roth IRA, but not all annuities are Roth IRAs, nor are all Roths annuities.
Annuities can be fixed, variable or indexed. If the investments inside the annuity are mutual funds, it's a variable annuity. If the investments inside the annuity give a fixed interest rate return, it's a fixed annuity. An indexed annuity offers a chance to participate in the returns of a specific index, such as the S&P 500, or to receive a guaranteed rate -- whichever is larger.
Roth IRAs use many different types of investments to fund the retirement plan. You can use stocks, bonds, CDs and even annuities when you invest in a Roth. The only difference between a non-qualified investment and a Roth is that you designate the funds as a Roth by signing one extra form.
When Size Counts
In 2019, you can only contribute $6,000 to a Roth if you're under 50, and $7,000 if you're over 50. If you use an annuity for a Roth, the same holds true. However, if you invest in a non-qualified annuity, one that's not in any type of IRA or pension, you can put any amount in you desire.
Income and Other Plans
If you have no other pension plan at work, you don't have income limits to invest in a Roth. In 2019, the IRS begins to limit your contributions as a single person when your income hits $122,000, and you can no longer contribute at $137,000. The same holds true for married people filing jointly, except the limitations begin at $193,000 and contribution amounts phase out at $203,000.
Married filing separately have almost no chance to have a Roth. The contribution limits start to phase out when the income rises above -0- and ends at $10,000. The income limitations don't increase in 2019. There is no income limit to own an annuity, no matter how many plans or IRAs you have.
While the annuity sounds great for tax-free growth, no income restrictions and high contribution limits, the Roth offers a huge benefit that a non-Roth annuity doesn't have -- tax-free withdrawal. If you take your funds after the age of 59 1/2, you pay no taxes on the money you withdraw from a Roth. When you take the funds from an annuity, the government uses the LIFO rule -- last in, first out. That means they count interest first, since it's normally the last into the contract. Therefore, you pay taxes on any money you withdraw until you reach the amount of your deposit.
- How to Transfer an Annuity to an IRA
- Choosing Annuities for Large Sums of Money
- Retirement Guide for People in Their 20s
- Roth Vs. Traditional Vs. Rollover IRA
- Differences in SEP IRAs, Roth and Traditional
- What Is the Penalty for Annuity Withdrawal?
- Tax-Advantaged Investment Options
- Are Roth IRA Contributions Taxable After 59 1/2?