How to Create a Pension for Yourself: IRAs, Annuities, and Withdrawals

Creating a pension for yourself is a two-phase project: stack tax-advantaged savings accounts during your working years, then convert that balance into reliable monthly income when you stop working. The main tools are individual retirement accounts, self-employed retirement plans, and annuity contracts, each governed by a different corner of the Internal Revenue Code with its own contribution limits, tax rules, and withdrawal timelines. For 2026, the IRS raised contribution ceilings across the board, so you can shelter more from taxes this year than you could even a year ago.¹ Which combination of tools fits you depends on whether you earn a traditional paycheck, run your own business, or both.

Start With an IRA

A Traditional or Roth IRA is the most accessible retirement account because almost anyone with earned income can open one. A Traditional IRA, established under 26 U.S.C. § 408, takes pre-tax dollars that grow untaxed year to year. You pay income tax only when you withdraw the money in retirement, ideally at a lower rate than you’re paying now.² Whether your contribution is deductible depends on your income and whether you or your spouse are covered by a workplace plan. For 2026, single filers covered by a workplace plan lose the full deduction once income exceeds $91,000; married joint filers see the phase-out end at $149,000.¹

A Roth IRA, governed by 26 U.S.C. § 408A, flips the tax deal. You contribute money you’ve already paid tax on, and both the growth and qualified withdrawals come out tax-free.³ A withdrawal is “qualified” only if the account has been open at least five years and you’re 59½, disabled, or the distribution follows the owner’s death.⁴ The five-year clock starts January 1 of the year you make your first contribution, so opening the account early matters even if you fund it with a small amount. Roth IRAs also carry no required minimum distributions during your lifetime, which makes them useful for late-in-life expenses or leaving money to heirs.

For 2026, the annual IRA contribution limit is $7,500, plus a $1,100 catch-up if you’re 50 or older, for a total of $8,600. That cap applies across all your IRAs combined. Split $5,000 into a Traditional and $5,000 into a Roth in the same year and you’ve exceeded the limit, which triggers a 6% excise tax on the excess for every year it stays in the account.⁵ Your contributions also can’t exceed your actual earned income for the year.

Spousal Contributions

If one spouse doesn’t work, the working spouse’s income can still support IRA contributions for both. Each can contribute up to the full $7,500 (or $8,600 if 50 or older) as long as the couple files jointly and the working spouse earns enough to cover both contributions.⁵ It’s one of the most overlooked ways to accelerate savings for a single-earner household.

The Backdoor Roth for High Earners

Roth contributions phase out for single filers with modified adjusted gross income between $153,000 and $168,000, and for joint filers between $242,000 and $252,000. Above those thresholds, direct contributions aren’t allowed. The workaround is to make a non-deductible contribution to a Traditional IRA (no income limit applies there) and then convert those funds to a Roth. It’s legal and widely used, but if you already hold pre-tax money in any Traditional, SEP, or SIMPLE IRA, the IRS applies a pro-rata rule that makes part of the conversion taxable. The cleanest fix is to roll existing pre-tax IRA balances into a workplace 401(k) first, so the only money left in the Traditional IRA is the fresh non-deductible contribution.

If You’re Self-Employed, Use a Higher-Limit Plan

Any self-employment income, even a side gig, opens the door to plans with far higher ceilings than a standard IRA. Two are practical for solo operators.

SEP IRA

A Simplified Employee Pension IRA lets you contribute up to 25% of your net self-employment earnings, capped at $72,000 for 2026.⁶ Contributions are tax-deductible for the business and flow into a Traditional IRA in the owner’s name. The appeal is simplicity: no annual filing, no complex plan document, and you can open and fund one right up to your tax-filing deadline including extensions. There’s no employee deferral component, though, so everything comes from the employer side, and the contribution math on net self-employment income is less obvious than it looks because you first subtract half your self-employment tax.

Solo 401(k)

A Solo 401(k) covers a business owner with no employees other than a spouse. You wear both hats, so you can contribute from both sides. The employee deferral limit for 2026 is $24,500, and the employer side can add up to 25% of compensation on top of that.⁷ Combined contributions cap at $72,000.⁶

Catch-up contributions make the Solo 401(k) even stronger for older workers. Between ages 50 and 59, or 64 and older, you can add another $8,000 above the ceiling for a total of $80,000. Between 60 and 63, SECURE 2.0 created an enhanced catch-up of $11,250, pushing the total to $83,250.¹ That kind of annual contribution can build a sizable balance quickly, which is the point if you started saving late.

The Solo 401(k) takes a little more administration than a SEP. You need an Employer Identification Number, a formal plan document adopted before December 31 of the year the plan takes effect, and once plan assets exceed $250,000 at year-end, you must file Form 5500-EZ annually.⁷ Missing that filing threshold is one of the more common compliance mistakes, and it carries penalties.

Turning Savings Into a Monthly Check

Saving is only half the job. The other half is converting the balance into predictable monthly income that lasts as long as you do. Two main approaches solve that problem, and many people use both.

Annuities

An annuity is a contract with an insurance company: you hand over a lump sum (or a series of payments), and the insurer guarantees you income for a set period or for life. The tax treatment falls under 26 U.S.C. § 72.⁸ An immediate annuity begins paying within a year of purchase. A deferred annuity grows during an accumulation phase before you flip the switch to income.

Taxation depends on the source of the money. If you bought the annuity with after-tax dollars, each payment splits between a tax-free return of your original investment and taxable earnings, using an exclusion ratio the IRS calculates from your life expectancy and the contract terms.⁸ If the annuity sits inside a pre-tax retirement account, the entire payment is ordinary income.

Two cost issues matter before you sign anything. All-in annual costs on a variable annuity commonly run 2% to 3% once mortality and expense charges, investment fees, and optional income riders are combined. And surrender charges lock up your money: they typically last six to eight years, starting as high as 7% of contract value and declining each year. If you might need access to the funds within a few years, a deferred annuity is probably the wrong vehicle. Payments are also backed only by the issuing insurer, not the federal government; state guaranty associations provide a backstop, typically at least $250,000 per owner per insurer, so splitting a large annuity purchase between two highly rated insurers is a reasonable precaution.

A Qualified Longevity Annuity Contract is a specialized deferred annuity you buy inside a retirement account. It starts paying at a future date you choose, typically 80 or 85, and the purchase amount is excluded from your required minimum distribution calculations. For 2026, you can put up to $210,000 into a QLAC.⁶ The tradeoff is that you give up access to those funds for years, and a QLAC without a death benefit returns nothing if you die before payments begin. QLACs work best as longevity insurance for people genuinely worried about outliving their savings in their 80s and 90s.

Systematic Withdrawals

Not everyone wants to hand a lump sum to an insurance company. The alternative is to keep the money invested and draw it down on a schedule. The best-known framework is the 4% rule: withdraw 4% of your portfolio in year one, then adjust that dollar amount for inflation each year after. On a $1 million portfolio, that’s $40,000 the first year, and roughly $41,000 the next if inflation runs 2.5%. The rule was built around a 50/50 stock-and-bond allocation and a 30-year retirement.

You keep control of your assets, you can dial withdrawals down in bad years, and your heirs inherit whatever’s left. But nothing is guaranteed. A steep market drop early in retirement can permanently damage the portfolio’s ability to sustain withdrawals, and living well past 30 years in retirement stresses the math.

A hybrid approach is common: cover essential expenses with Social Security and a modest annuity, then use systematic withdrawals from an investment portfolio for lifestyle spending. Guaranteed income handles the bills you can’t skip; the portfolio handles the spending you can adjust.

Keep Inflation From Eroding the Check

A fixed annuity paying $3,000 a month at 65 buys roughly what $1,660 buys today after 20 years of 3% inflation. Fixed income erodes, and most people underestimate how much.

One option is a cost-of-living adjustment rider on the annuity, which raises payments annually by a fixed percentage or tracks the Consumer Price Index. The rider lowers your starting payment significantly because the insurer is pricing decades of rising obligations. Whether it pays off depends on longevity. Retire at 65 and live to 90, and the COLA rider almost always wins; die before 75, and the standard fixed annuity would have delivered more total income.

On the investment side, Treasury Inflation-Protected Securities and I Bonds provide returns that adjust with inflation. Holding a portion of your retirement portfolio in these instruments creates a natural hedge alongside fixed annuity income. The goal isn’t to eliminate inflation risk but to make sure some portion of your income keeps pace with rising costs.

Rules That Can Undo the Plan

Required Minimum Distributions

The IRS doesn’t let you shelter money in a tax-advantaged account forever. Starting at age 73, you must take required minimum distributions from Traditional IRAs, SEP IRAs, and most employer plans like 401(k)s.⁹ The first is due by April 1 of the year after you turn 73, and every one after that by December 31. Under SECURE 2.0, the starting age rises to 75 for anyone who turns 73 after December 31, 2032.¹⁰

Missing an RMD is expensive. The IRS imposes a 25% excise tax on what you should have withdrawn but didn’t.¹¹ Catch the mistake and take the missed distribution within the correction window and the penalty drops to 10%. Still steep. A calendar reminder or automatic distribution from your custodian handles it. Original Roth IRA owners are the exception: no RMDs during your lifetime.

Getting to the Money Before 59½

Withdrawals from a Traditional IRA or 401(k) before 59½ normally trigger a 10% early withdrawal penalty plus regular income tax. The tax code carves out exceptions, and one of the most useful for someone building a self-funded pension is the Substantially Equal Periodic Payment rule under 26 U.S.C. § 72(t).¹²

A 72(t) plan commits you to a fixed series of annual withdrawals calculated by one of three IRS-approved methods: required minimum distribution, fixed amortization, or fixed annuitization.¹² Amortization and annuitization generally produce larger annual payments than the RMD method. The critical rule: once you start, you have to keep going for at least five years or until 59½, whichever is longer. Modify the schedule before that and the 10% penalty applies retroactively to every distribution you’ve already taken. Not a casual decision. It fits people who retire early and need a bridge before other income sources begin.

Other penalty exceptions include permanent disability, a first-time home purchase (up to $10,000 lifetime), qualified higher education expenses, certain unreimbursed medical costs, and distributions to military reservists called to active duty. Each has specific qualifying conditions, so check yours before withdrawing.

Prohibited Transactions

The IRS is strict about what you can do with retirement plan assets. A prohibited transaction causes the IRS to treat your entire IRA as if it were distributed to you on the first day of the year the violation occurred.¹³ Income tax on the full fair market value, plus the 10% early withdrawal penalty if you’re under 59½. One mistake wipes out years of tax-deferred growth.

The most common prohibited transactions: borrowing from your IRA, selling personal property to it, using IRA funds to buy property for your own use, and pledging the account as collateral for a loan.¹³ The rules extend to transactions with “disqualified persons,” which includes your spouse, parents, children, and their spouses. Buying a rental property inside a self-directed IRA is legal, but if your son does the repairs or you stay in the property for a weekend, you’ve crossed the line. Anyone opening a self-directed IRA for real estate or private-company investments should learn these rules cold before moving money.

Opening and Funding the Accounts

Opening a retirement account takes a Social Security number or Taxpayer Identification Number, a government-issued ID, and a residential address. Most custodians handle everything online. For a SEP IRA or Solo 401(k), you’ll also need your Employer Identification Number and your business formation documents.

Funding usually happens by ACH transfer from your bank, clearing in three to five business days. If you’re moving money from a former employer’s plan, request a direct rollover so the old plan administrator sends funds straight to the new custodian. The administrator may issue a check payable to the new custodian rather than to you, which is normal and avoids the 20% mandatory withholding that applies when retirement funds are paid directly to you.¹⁴ If you do receive the check yourself, you have 60 days to deposit the full distribution amount into a qualified account or the entire amount becomes taxable.¹⁵

Once funded, automate monthly contributions so saving happens without your involvement. Choose your investments, or for annuities, choose your payout structure and complete Form W-4P to control federal income tax withholding from periodic payments.¹⁶ Review beneficiary designations every year. Beneficiary forms on retirement accounts override whatever your will says, and getting them wrong is one of the most common estate planning mistakes.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
3
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
4
Internal Revenue Service. Retirement Topics – Designated Roth Account
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Internal Revenue Service. Retirement Topics – IRA Contribution Limits
6
Internal Revenue Service. IRS Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
7
Internal Revenue Service. One-Participant 401(k) Plans
8
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
9
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
10
Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners
11
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
12
Internal Revenue Service. Substantially Equal Periodic Payments
13
Internal Revenue Service. Retirement Topics – Prohibited Transactions
14
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
15
Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans
16
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments