It’s an old rule of thumb (emphasis on the word old) that investors shouldn’t buy annuities in their retirement accounts. It was a good rule when tax deferral was the only goal. But these days, clients most often buy annuities for their retirement income or principal guarantees —these guarantees can make sense anywhere clients are worried about their retirement assets, including IRAs.
The guarantees might either provide for current guaranteed income or secure a guaranteed base of lifetime income for future distributions.
In fact, it appears consumers were already figuring out the irrelevance of the “don’t buy annuities inside of retirement accounts” rule all by themselves. According to LIMRA, in 2012 more than 60 percent of deferred variable and fixed indexed annuity purchases were being funded with IRA dollars!
Similarly, the emergence of guaranteed living benefit riders on fixed indexed annuities has arguably made them even more popular as a potential fit within retirement accounts, both for the risk/return characteristics of the annuity as an investment and the guaranteed income features for retirement income.
Nonetheless, the reality — as evidenced by the incredibly high election rate for buyers of annuities with guaranteed living benefit riders, and the rise of fixed indexed annuities as well — is that the majority of annuity purchases are still about buying access to guarantees and/or for unique investment opportunities (e.g., the risk/return profile of an equity-indexed annuity or a compelling yield in a fixed annuity). They’re NOT for tax deferral!
The Bottom Line: Given these changes, it is perhaps time to abolish the “annuities should never go into an IRA” rule and recognize that it has become more a myth than sound advice in today’s environment.
© 2018 Ash Brokerage LLC.