Exactly what IS the difference between an annuity and an IRA (individual retirement account)? Do annuities still makes sense, given the arrival of the Roth IRA and the "new-and-improved" traditional IRA? I'll attempt to answer these and other questions in the next few articles, starting with today's overview of the important differences between IRAs and annuities. Future pieces will look at what Roth and traditional IRAs, as well as fixed and variable annuities, each have to offer.

For retirement investors, traditional IRAs and annuities offer similar advantages, including the opportunity to put off paying taxes on any earnings until withdrawal. Both the Roth and traditional IRA and annuities also carry similar tax penalties for any "unauthorized" early withdrawals before age 59-1/2 - a 10% tax penalty on top of any income taxes owed.  However, each investment has features that make it appropriate for different types of investors. 

Some of these include -

Tax-deductible contributions - All or a portion of traditional IRA contributions may be tax deductible [depending on income level and your own or your spouse's eligibility to participate in an employer-sponsored retirement plan, such as a 401(k)]; annuity contributions are not.

Tax-free withdrawal of earnings - The Roth IRA allows you to build earnings (interest and capital gains) tax-free, though tax-deductible contributions are not permitted. With annuities and traditional IRAs, you always owe income taxes on earnings at some point.

Withdrawal minimums - IRAs limit the amount you can contribute each year ($2,000 per person), while annuities allow unlimited annual contributions.

Withdrawal minimums - To avoid tax penalties traditional IRA withdrawals must begin at 70-1/2, while Roth IRAs and annuities typically allow you to put off making withdrawals until later on.

The life insurance bonus - Annuities offer a guaranteed death benefit (payment to a beneficiary), while IRAs do not. On the other hand, annuities may also carry some special fees associated with these life insurance benefits.

An IRA can be a terrific way to invest for retirement, especially if you are able to deduct from your income all or a portion of your contributions. Annuities - although contributions aren't tax deducible - can be particularly attractive if you're looking for tax-advantaged growth opportunities well into your retirement years, are not planning to make withdrawals for several years, and seek some of the benefits of a life insurance policy.