Insurance Continuing Education - Individual Retirement Annuity

Individual Retirement Annuities (IRAs) which are established on an individual basis, allow wage earners to make independent contributions to their own retirement plans. Either a fixed or Variable Annuity may be used. An IRA is always a flexible premium deferred annuity. IRAs provide a limited tax deduction for the individual's contribution as well as interest accumulation on a tax-deferred basis. Instruments other than annuities may be used to establish individual retirement accounts, but this discussion is limited to annuities used for this purpose.

Originally, the purpose of an IRA was to offer retirement savings incentives to people not included in a corporate or employer-sponsored plan. This is still the primary use for an IRA, but some people who are covered by employer plans may establish tax-deductible IRAs as well.

A popular use for an individual annuity is as a rollover IRA to receive money from a company-sponsored pension or profit sharing plan. Individuals who leave an employer take with them any such monies in which they are fully vested-which means they own 100% of their share of the plan. To protect themselves from adverse tax consequences, they must have the funds immediately reinvested in another tax-favored plan. A rollover IRA provides this protection.

At one time, individuals could have possession of such funds for 60 days before rolling the funds into another plan. However, by federal law, to avoid all penalties the corporate plan proceeds must be paid from the former employer's plan directly into another instrument. If the individual chooses to have a check made payable to him or herself while deciding where to re-invest the money, the employer is required by law to withhold 20% and send it to the IRS.

Further information regarding the regulations regarding rollover into IRA's, etc., are discussed elsewhere in this text. A point to remember specifically is that if the entire amount, which includes the 20% that is "earmarked" for the government, is not rolled over within 60 days; there are dire tax consequences. A rollover IRA that is used properly keeps the funds intact and retains the tax-deferral benefits on the pension funds.

A "Roth IRA" will be discussed in detail elsewhere in this text. An annuity may be used to fund a Roth IRA, the difference being as to when taxes must be paid on the investment income.



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