Self-directed IRAs are perhaps the most flexible way to save for retirement while still having the opportunity to gain significant tax advantages. There are a wide range of investment options available (including real estate, precious metals, certain oil and gas development interests, private equity and debt instruments, and even private mortgages), all in an account that offers tax-deferred or tax-free growth, and may even offer the opportunity to take a current year deduction for your account contribution.
Because of concerns about income investment yields, some self-directed IRA account owners have begun thinking about purchasing annuities with their self-directed IRA. Let’s take a closer look at whether that type of investment might be right for your account.
What Are Annuities?
Let’s first take a few moments to discuss the structure and key elements of annuities. An annuity is essentially a contract between you and an insurance company, whereby you pay a lump sum of money to the insurance company and they promise to pay you a monthly benefit in return. It can be helpful (although a bit of an oversimplification) to think of purchasing an annuity as similar to purchasing a pension benefit.
Different Types of Annuities
At the outset, it’s important to understand that there are two basic types of annuities; immediate and deferred. Immediate annuities begin to provide you with a monthly benefit immediately after you purchase it, while a deferred annuity will invest your money for you until a point in the future where you begin receiving income payments (which typically occurs during retirement).
But the distinction between deferred and immediate annuities only generally describes the many variations of annuities that are out there. For example, the benefit term for an annuity can be the life of the person who purchases it, or their life plus the life of their spouse, or their life plus a guaranteed term (so that a beneficiary would continue to receive income if the annuity holder dies before the expiration of that guaranteed term).
Suitability to Purchase With a Self-Directed IRA
If you are concerned about being able to count upon a minimum level of income for you and your spouse during retirement, then an immediate annuity might be the perfect solution if you’re at or very close to retirement age. Certain annuities even provide an annual increase in your benefit to help you keep up with inflation. An immediate annuity might also be structured to help you meet your required minimum distribution obligations if you have a traditional self-directed IRA.
On the other hand, purchasing a deferred annuity when you’re relatively young might not be a good investment because you’re essentially locking investment opportunity down to a low investment return.
In short, the answer to the question “do annuities have a place in my self-directed IRA?” is “maybe.” Depending on your needs, the size of your retirement savings, as well as your current age, there may very well be an annuity product that’s a good fit.
Furthermore, the insurance industry is constantly trying to create new products to make sure that everyone’s needs are met, so if there’s not currently an annuity on the market that makes sense for you, there might be one within the next several years.