Can You Buy an Annuity in an IRA? Funding, Fees, and RMDs

Yes, buying an annuity in an IRA is allowed under federal law, and you can do it inside either a Traditional or a Roth IRA using fixed, variable, or indexed products. The catch is that an IRA already gives you tax-deferred (or tax-free) growth, so the annuity’s own tax deferral adds nothing. You should only make the purchase if you actually want what an annuity uniquely provides: a guaranteed income stream, principal protection, or a death benefit.

What the Law Allows

Internal Revenue Code Section 408 opens two paths. Under Section 408(a), an IRA trust can hold annuity contracts alongside other investments, as long as the trust has a qualified trustee and the funds stay nonforfeitable. Under Section 408(b), the annuity contract itself is the IRA, issued directly by an insurance company with no separate custodial account.¹

One boundary matters: IRA funds cannot be invested in life insurance. Annuities are permitted because they primarily provide income rather than a death benefit, though incidental death benefits (such as returning the account value to a beneficiary) are fine. The product has to be structured and sold as an annuity, not a life insurance policy.¹

Why the Reason for Buying Matters

Annuities grow tax-deferred on their own. So does a Traditional IRA, and a Roth IRA does better than that. Putting an annuity inside either wrapper gives you no extra tax break, but you still pay the annuity’s insurance fees, which ordinary IRA investments like mutual funds do not carry.

Variable annuities carry the highest costs. The SEC notes that annual mortality and expense risk charges typically run around 1.25%, with additional administrative fees of roughly 0.15% per year or a flat charge of $25 to $30, plus the expenses of the underlying investment funds.² Fixed and fixed-indexed annuities generally have lower ongoing costs because the insurer builds its expenses into the credited interest rate rather than deducting them separately, but surrender charges still apply if you withdraw early. The practical test: are the insurance guarantees you’re paying for worth more than a simpler, cheaper IRA investment?

How the Purchase Gets Funded

For 2026, you can contribute up to $7,500 to your Traditional and Roth IRAs combined, or $8,600 at age 50 or older.³ Those limits govern new contributions from earned income. They do not cap what you can transfer or roll over from an existing IRA or employer plan, because transfers and rollovers are not treated as new contributions.

That distinction matters because most IRA annuities are funded by transferring money already sitting in another IRA, often at retirement when someone wants to convert a lump sum into guaranteed income. A standalone annuity contract held under Section 408(b) has to keep annual premiums within the contribution limit, but when you fund an annuity inside a custodial IRA through a transfer, the full transferred amount can be applied to the contract.¹

Steps to Buy the Annuity

Prepare the Application

Pick the carrier and product type first, whether that’s a multi-year guaranteed annuity, a fixed-indexed annuity, or a variable annuity. You’ll need your Social Security number, date of birth, and current address. Pull a recent statement from your existing IRA custodian showing the account number and balance to verify the source of funds.

Get the titling right. The contract should be owned by the custodian for your benefit, typically formatted as “[Custodian Name] as Custodian for the IRA of [Your Name].” That keeps the annuity inside the IRA tax wrapper. If the contract is issued in your personal name, the IRS may treat the whole purchase as a taxable distribution.

Insurance carriers will also require a suitability questionnaire covering your income, liquid assets, risk tolerance, and objectives. This is driven by regulations that hold insurance agents to a best-interest standard on annuity recommendations.

Move the Money

A direct custodian-to-custodian transfer is the safer route. You submit a Transfer of Assets form with the signed annuity application, and the insurance company requests the funds directly from your current custodian. Nothing passes through your hands, so there is no withholding and no deadline to miss. Digital transfers can complete in about a week; paper-based transfers may take several weeks.⁴

An indirect rollover, where the money is paid to you first, gives you 60 days to deposit it into the new annuity. Miss that window and the entire amount is taxable income, plus a 10% early withdrawal penalty if you’re under age 59½.⁴ Indirect rollovers are also capped at one per 12 months across all your IRAs. Direct trustee-to-trustee transfers are exempt from that limit.⁵

Use the Free-Look Period

Once the insurance company receives the money and issues the contract, a free-look period begins. This window runs roughly 10 to 30 days depending on the state where the annuity was sold, and it lets you cancel for a full refund of premium.⁶ For variable annuities, the refund can be adjusted up or down to reflect the performance of your investment options during the window, so you may get back slightly more or less than you paid.⁷ After that period, the contract is fully in force.

Fees, Surrender Charges, and Early Withdrawal

Surrender charges are usually the largest cost you’ll encounter. They generally start at up to 10% in the first year and decline to zero over roughly six to eight years. Most contracts allow you to take out around 10% of the account value each year without triggering the charge.

Variable annuities layer on ongoing costs: a mortality and expense risk charge around 1.25%, administrative fees around 0.15% annually or a flat $25 to $30, and the expense ratios of the underlying funds.² Optional riders like guaranteed lifetime withdrawal benefits or enhanced death benefits typically add 0.50% to 1.00% or more per year. Fixed and fixed-indexed annuities usually have no separately stated annual fees; the insurer recovers its costs by crediting a lower interest rate than you might otherwise earn.

Pulling money out under age 59½ can trigger two separate penalties on the same withdrawal: the IRS’s 10% early distribution penalty and the insurer’s surrender charge. They stack.

Required Minimum Distributions

If the annuity sits in a Traditional IRA, RMDs kick in the year you turn 73.⁸ You can defer the first one until April 1 of the following year, but that stacks two distributions into a single tax year and can push you into a higher bracket.

Calculation depends on the annuity’s phase. During accumulation, you divide the contract’s fair market value on the prior December 31 by the applicable factor from the IRS Uniform Lifetime Table.⁹ Once the contract has been annuitized into scheduled payments, those payments generally satisfy the RMD for that asset. Missing the required amount triggers an excise tax of 25% on the shortfall.⁸

Roth IRA annuities are different. RMDs do not apply to Roth IRAs during the original owner’s lifetime, so a Roth annuity can keep growing tax-free until you choose to draw from it.⁸

Qualified Longevity Annuity Contracts

A qualified longevity annuity contract, or QLAC, is a specialized deferred annuity bought with IRA or 401(k) money that lets you push the income start date as late as age 85. The amount you put into a QLAC is excluded from your RMD calculations, so the money keeps growing until payments begin. For 2026, the QLAC cap is $210,000 across all your IRAs and employer plans combined.¹⁰ The trade-off is that the money is locked up until the start date, and QLACs generally have no cash surrender value.

Prohibited Transactions

Some moves will destroy the IRA. You cannot use the annuity or any part of your IRA as collateral for a loan; if you do, the pledged amount is treated as a distribution, taxable and subject to the 10% early withdrawal penalty if you’re under 59½.¹

Broader prohibited transactions include lending between your IRA and yourself, selling or exchanging property between your IRA and a disqualified person, or using IRA assets for personal benefit. Disqualified persons include you, your spouse, your parents, your children and their spouses, and any fiduciary of the account.¹¹ Engage in one and the IRA loses its tax-advantaged status as of the first day of that tax year, and the entire balance is treated as distributed to you on that date.¹ Income tax on the whole balance, plus the 10% penalty if it applies, can be a devastating result on a large account.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
U.S. Securities and Exchange Commission. Variable Annuities – What You Should Know
3
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
4
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
5
Internal Revenue Service. Application of One-Per-Year Limit on IRA Rollovers
6
FINRA. Annuities – Investment Products
7
Investor.gov. Variable Annuities – Free Look Period
8
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
9
Internal Revenue Service. 2025 Publication 590-B
10
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living
11
Internal Revenue Service. Retirement Topics – Prohibited Transactions