Personal Finance: Ask the Experts

A: An annuity is one investment option available for your IRA money, as are mutual funds, certificates of deposit and many other types of investments. Although many wealth advisors recommend against holding an annuity within an IRA, if both of you are in good health and your concern is running out of income, an annuity may be appropriate.

There are two primary reasons why you might want to put your IRA dollars into an annuity. First, you can take advantage of annuitization, creating a stream of income that is guaranteed to last a set period of time, perhaps through the remainder of your life. Most annuities come with an income rider that will allow income for life of around 5 percent or your Required Minimum Distribution (RMD), whichever is higher.

Since you are taking RMD from your IRAs, this would allow you to continue to take the RMD with confidence that, if the account is depleted, the insurance company would continue income payments for either one or two lives.

Second, if you put your IRA money into certain variable annuities, you may be able to get a death benefit guarantee. With this guarantee, your beneficiaries are somewhat shielded against downturns in the market that might lower the value of your investment.
The death benefit guarantee assures that the insurance company will pay (at your death) either the current value or the original principal (minus any withdrawals), whichever is greater. Therefore, your beneficiary can recover your initial investment (minus any withdrawals) if you die after a market downturn that has reduced the value of your investment. If you are uncomfortable with the risk of investing in stock funds, for instance, the death benefit guarantee reduces your risk somewhat, from the perspective of the beneficiary or beneficiaries.

On the other hand, it is important to also understand two strong arguments against putting your IRA money into an annuity.

First, both IRAs and annuities are tax-deferral mechanisms. If you are already deferring taxation by setting up an IRA, you gain no further tax advantage from investing in an annuity.
Second, you are required to pay a mortality and expense fee (generally 1 percent of your investment), along with an annual contract fee for annuities. These fees are on top of any custodial fees that you may be paying for your IRA itself. Over time, this combination of fees may eat away at the growth of your investment.

Also, there are alternatives to annuities, such as Contingent Deferred Annuities (CDAs). CDAs essentially guarantee your income stream for your life (or joint lives) in your IRA or other types of accounts and you don't have to move your money into a variable annuity contract. They can still provide your 4-8 percent guaranteed income stream for life, depending on your age.

After explaining some of the pros and cons of annuities, I want to offer a word of caution. Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.