Yes, you can buy an annuity in an IRA. Federal tax law specifically provides for it: under 26 U.S.C. § 408(b), an insurance contract that meets a short list of requirements qualifies as an “individual retirement annuity” and gets the same tax-deferred treatment as any other IRA.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts For 2026, contributions are capped at $7,500, or $8,600 if you are 50 or older.2Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The account still functions as an IRA. The difference is what sits inside it: an insurance company’s annuity contract rather than stocks or mutual funds.
What Makes an Annuity IRA-Eligible
Not every annuity qualifies. The statute sets four requirements the contract must meet.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
- It must be non-transferable. You cannot sell, assign, or give the contract to anyone else; it stays in your name only.
- It must allow flexible premium payments rather than a locked-in schedule.
- If the insurer refunds any premiums, those dollars must be applied to future premiums or additional benefits under the same contract before the end of the following calendar year.
- It cannot be a life insurance contract. The purpose has to be retirement income, not a death benefit.
You also have to be the sole owner. The insurance company must specifically designate the product as qualified for use in a tax-advantaged retirement account, so check the contract language before you sign. If any of these requirements are broken, the IRS can strip the account of its IRA status. The entire balance becomes taxable that year, and anyone under 59½ owes an additional 10% penalty on top.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Annuity Types That Work Inside an IRA
Several structures are commonly used, each with a different risk profile.
- A fixed annuity pays a guaranteed interest rate for a set period. Growth is predictable and principal is backed by the insurer’s claims-paying ability.
- A variable annuity puts your money into sub-accounts holding market-based investments. The value rises and falls with market performance.
- A fixed-indexed annuity ties growth to a market index like the S&P 500 while providing a floor against losses. In exchange, gains are typically capped or limited by a participation rate.
- A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity that can begin paying out as late as age 85. Money in a QLAC is excluded from the balance used to calculate required minimum distributions.
The Variable Annuity Redundancy
An IRA already grows tax-deferred. A variable annuity also grows tax-deferred. Putting one inside the other adds no tax benefit, but it does add fees. Variable annuities typically charge mortality and expense risk fees, administrative fees, and underlying fund management fees that together can run 2% or more per year on top of anything the IRA custodian charges. What you gain are the insurance features, such as a guaranteed death benefit or a lifetime income rider. If those features do not matter to you, a lower-cost investment inside the IRA will usually leave you with more money at retirement. This is worth scrutinizing before you sign.
The QLAC Limit
The SECURE 2.0 Act set a lifetime QLAC funding limit of $200,000, indexed for inflation beginning in 2025, with increases rounded down to the next $10,000 increment.4Internal Revenue Service. Instructions for Form 1098-Q (04/2025) Check the current year’s cost-of-living figure before you commit. Because the start date is pushed out, the insurer can offer a larger monthly payout per dollar invested, which is useful if your concern is outliving your savings.
How Withdrawals Are Taxed
The tax treatment turns on whether the annuity sits in a Traditional or Roth IRA.
Traditional IRA Annuity
Every dollar you take out of a Traditional IRA annuity, whether as a lump sum, periodic payment, or annuitized income stream, is generally included in taxable income for the year and taxed at your ordinary income rate.5Internal Revenue Service. Retirement Plans FAQs Regarding IRAs – Distributions (Withdrawals) If you made nondeductible contributions along the way, the portion of each distribution proportional to your after-tax basis is not taxed again. You track that basis on IRS Form 8606.
Roth IRA Annuity
Roth distributions are fully tax-free if two conditions are met: you are at least 59½, and at least five years have passed since you first funded any Roth IRA. When both are satisfied, contributions and earnings come out without federal income tax. Earnings withdrawn before meeting both conditions may be taxable and subject to the 10% early withdrawal penalty.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
The Early Withdrawal Penalty
Taking money out before 59½ generally triggers a 10% additional tax on top of any regular income tax. Exceptions include total and permanent disability, qualified higher education expenses, a first-time home purchase up to $10,000, and substantially equal periodic payments under the 72(t) rule.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions An exception waives only the 10%; ordinary income tax on a Traditional IRA distribution still applies.
Required Minimum Distributions
Once you reach age 73, you have to start withdrawing a minimum amount each year from Traditional IRA accounts, including annuities held inside them.6Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The RMD for each IRA is the prior December 31 balance divided by a life expectancy factor from the tables in IRS Publication 590-B.
One rule matters especially if you own an annuity. When you have multiple IRAs, you calculate each account’s RMD separately but can pull the total from any single IRA or split it across them.7Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans) If your IRA annuity has surrender charges or limited liquidity, you can satisfy its RMD out of a different IRA instead of cashing out part of the annuity.
Roth IRAs are exempt from RMDs during the original owner’s lifetime, so a Roth used to hold an annuity can keep growing tax-free for as long as you live.
Costs to Understand Before You Buy
Surrender Charges
Most annuities charge a surrender fee if you withdraw more than a set amount during the early years of the contract. Surrender periods commonly last six to eight years. The charge often starts around 6% or 7% in year one and drops by roughly a percentage point per year until it disappears. Some contracts allow annual penalty-free withdrawals of up to 10% of account value. Before signing, confirm the length of the surrender period and the year-by-year schedule.
Ongoing Fees
Fixed annuities generally carry lower internal costs because the insurer bears the investment risk. Variable annuities stack several charges: a mortality and expense risk fee (often around 1.25% per year), an administrative fee, and the management fees inside the sub-accounts. Total annual costs on a variable annuity can run 2% to 3% of account value. Fixed-indexed annuities fall between the two, with costs typically embedded in the cap rate or participation rate rather than billed separately. Optional riders such as income guarantees or enhanced death benefits add their own annual charges.
How to Buy the Annuity
Apply
You can get application forms directly from the insurance company or through a licensed financial professional. Have your Social Security number, date of birth, current address, a recent statement from any IRA or 401(k) you plan to draw from, and beneficiary information ready. Expect the carrier to also collect suitability information: income, net worth, investment experience, and risk tolerance. State insurance rules require that annuity recommendations be in the consumer’s best interest.
On the application, specify the tax qualification status, Traditional or Roth, because that field controls how contributions and distributions are reported. Getting it wrong creates reporting problems later. You will also indicate whether the contract is in accumulation mode or will begin paying out immediately.
Fund It
Two methods move money into the annuity.
- A direct trustee-to-trustee transfer sends the money from your current IRA custodian straight to the insurer. No taxes are withheld, no time limit applies, and it does not count against the one-rollover-per-year rule. For most people this is the cleanest route.
- A 60-day indirect rollover means you receive a check and have 60 days to deposit it into the new annuity. The IRS limits you to one indirect rollover across all your IRAs in any 12-month period. Your current custodian will withhold 10% for federal taxes unless you opt out; if you want to roll over the full balance, you have to make up that withheld amount from other funds and claim it back when you file.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Transfers typically take two to four weeks depending on how quickly the delivering institution processes the paperwork.
Use the Free-Look Period
Once the insurer issues the contract, you enter a free-look period during which you can cancel for a full refund. Free-look rules come from state insurance law, not federal law, and vary by state. Most states require at least 10 to 30 days depending on the type of annuity and the buyer’s age, with older purchasers often getting a longer window. After the free-look period closes, canceling generally means paying surrender charges, so read the contract during this window and confirm every term matches what you were told.