Annuities Inside an IRA: Does It Ever Make Sense?

A few months ago, a couple in Gilbert came to me with a stack of statements and a simple question: “Did we make a mistake?” Years earlier, an advisor had moved a big chunk of their IRA into a variable annuity. They’d been told it would give them “tax-deferred growth” and “guaranteed income.” What nobody explained clearly was that their IRA was already tax-deferred, and that the annuity layered on roughly 2.5% to 3% per year in combined fees they hadn’t noticed. For example, on a $1 million position, that can quietly cost $25,000 to $30,000 a year before the investments even have a chance to grow.

If you’re a retiree or pre-retiree in Phoenix, Scottsdale, or Chandler with a sizable IRA, you’ve almost certainly heard the pitch. So let’s talk honestly about when an annuity inside an IRA makes sense, and when it’s simply a product that pays the salesperson more than it helps you.

The Core Problem: Tax-Deferring the Tax-Deferred

An annuity’s headline benefit is tax deferral. Your money grows without being taxed until you withdraw it. That’s genuinely valuable in a regular taxable brokerage account.

But a traditional IRA already gives you that exact benefit. The IRS doesn’t tax growth inside an IRA until you take distributions, no annuity required. So when someone wraps an annuity inside an IRA and sells it as a tax-advantaged strategy, they’re selling you a feature you already own. It’s like paying extra for a waterproof case on a phone that’s already waterproof.

This is why so many fee-only fiduciaries are skeptical of annuities held inside IRAs. You take on the annuity’s costs and complexity without gaining its single biggest theoretical advantage.

Where the Money Actually Goes

The reason this matters so much is cost. Annuities, especially variable and indexed ones, can carry several layers of fees that stack on top of each other:

• Mortality and expense (M&E) charges — an ongoing fee that often runs over 1% a year just for the insurance wrapper.
• Subaccount or fund fees — the underlying investments inside a variable annuity have their own expense ratios.
• Rider fees — those “guaranteed income” or “death benefit” add-ons typically cost another 1% or more annually.
• Surrender charges — penalties, sometimes 7% or higher in the early years, if you want your money back before a set schedule ends.

Add it up and you can easily reach 3% per year in total drag. Compounded over a long retirement, that’s an enormous amount of growth and spendable income surrendered to fees. And because annuities are commission-based products, an advisor selling one can earn a large upfront payout, which is exactly the conflict of interest a fee-only fiduciary is structured to avoid.

The Required Minimum Distribution Wrinkle

Here’s a complication specific to IRAs. Once you reach the age when required minimum distributions (RMDs) kick in, the IRS makes you withdraw a minimum amount each year. If your IRA is locked inside an annuity with surrender charges or a rigid payout structure, satisfying your RMD can get messy, and the rules around how annuitized values count toward RMDs are genuinely complicated. I’ve seen people forced into awkward, tax-inefficient withdrawals simply because their money wasn’t liquid. Flexibility you gave up years ago can come back to bite you precisely when you need options most.

So When Might an Annuity Inside an IRA Still Fit?

I want to be fair here, because “never” is rarely the honest answer in financial planning. There are narrow situations where an annuity, used thoughtfully, can play a legitimate role even within retirement accounts.

You want guaranteed lifetime income and you’ll actually value the certainty

Some retirees sleep better knowing a baseline of income arrives every month no matter what the market does. If you have a real fear of outliving your money and a pension isn’t part of your picture, converting a portion of your savings into guaranteed income can be a reasonable behavioral and planning choice, not because of tax magic, but because of peace of mind.

A Single Premium Immediate Annuity (SPIA) for income, not growth

The annuity I’m least skeptical of is the plain-vanilla SPIA. You hand over a lump sum and, in return, receive a fixed monthly payment for life (or for a set period). There are no subaccounts, no complicated riders, and the pricing is relatively transparent. For someone who wants to turn, say, a slice of a $2 million portfolio into a reliable income floor that covers essential expenses, a SPIA can do that job efficiently. It’s a tool for income certainty, not a tax shelter, and that’s the right way to think about it.

Even then, I’d encourage you to compare it honestly against alternatives. A high-quality bond ladder or a disciplined withdrawal strategy can sometimes deliver similar reliability with more flexibility and lower cost. Running the numbers side by side is exactly the kind of analysis our annuity vs. bonds calculator is built for, and it’s worth doing before you commit a large sum to anything irreversible.

How to Pressure-Test an Annuity Recommendation

If someone suggests putting an annuity inside your IRA, slow down and ask:

• What is the all-in annual cost? Get the M&E charge, fund fees, and every rider in writing.
• What is the surrender schedule? How long is my money locked up, and what’s the penalty to exit?
• How are you paid on this? A commission-based answer signals a built-in conflict.
• What problem does this solve that my IRA doesn’t already? If the answer is “tax deferral,” that’s a red flag.
• How does this affect my RMDs and my heirs? Liquidity and legacy both matter.

A trustworthy advisor will welcome these questions. If you’d like a second opinion from someone who isn’t paid to sell you the product, you can connect with a fee-only fiduciary advisor in Arizona who is legally bound to put your interests first. The difference between a fee-only and a fee-based advisor matters enormously here, because fee-based advisors can still earn commissions on exactly these products.

The Bottom Line

Putting an annuity inside an IRA usually means paying for tax deferral you already have, while taking on layers of cost that can quietly erode your retirement for decades. There are narrow exceptions, most notably a simple SPIA used deliberately for guaranteed income, but those are the exception, not the rule. Before you lock up a meaningful slice of your savings, get an objective, conflict-free analysis of whether the product actually serves your goals. If you want that kind of clarity, connect with a fee-only fiduciary advisor in Arizona who can model the trade-offs honestly and help you decide with confidence.

Important Disclosures

This material is intended for informational and educational purposes only and should not be construed as individualized investment, tax, or legal advice. Consult your own qualified advisor before acting on anything discussed here.

Investing involves risk, including possible loss of principal. Tax rules change and outcomes vary by individual circumstances. Arizona Fee Only is a directory and does not provide investment, tax, or legal advice.