8 Reasons to Buy an Annuity

6. A Tax-Free Stream of Income

One strategy to consider is purchasing an annuity inside of a Roth IRA. Assuming the five-year rule and other requirements have been satisfied, the annuity can generate tax-free income for your client. The rules of the Roth IRA account govern this type of nonqualified annuity.

While premiums can be paid from annual contributions, if they have a substantial balance in their Roth IRA, it may make sense for them to make one or more lump-sum premium payments. This may have come from Roth conversions done over the years and/or the rollover of a designated Roth account from a 401(k) or other type of employer retirement plan to a Roth IRA.

Doing a lump-sum premium payment can allow your client to fine-tune the annuity to their retirement income and tax planning needs. For example, they could purchase an immediate annuity to fill a portion of their retirement income stream, or they could purchase a deferred annuity that commences generating income at a future date when the tax-free income may be needed.

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