A lot of advisors say you should never put an annuity inside an IRA or a 401(k). An annuity is a contract with an insurance company that turns money into a stream of payments, now or later. Their argument is about taxes. Money in an annuity grows tax-deferred, which means you don't pay tax on the growth until you take it out. An IRA already grows tax-deferred. So why put a tax-deferred product inside a tax-deferred account?
On the tax point, I agree with them. Tax deferral is a bad reason to buy an annuity inside a retirement account, because the account already gives you that. If it's the only reason someone offers you, walk away.
I like an annuity inside a retirement account for a different reason, which is income. People used to describe retirement income as a three-legged stool: Social Security, a pension, and personal savings. For most workers, the pension leg got replaced by a 401(k), and a 401(k) is a pile of money that doesn't pay you anything on its own. A pension paid you every month for life, no matter how the market did. An annuity can put that guaranteed paycheck back. I explained the different kinds in an Annuities 101 video that I recorded right after buying one myself.
A guaranteed paycheck changes how you spend. Say you were stranded on an island with one bucket of fresh water and no idea when rescue would come. You'd drink as little as possible every day, because once the bucket's empty, it's empty. Now say the bucket refilled itself every morning. You'd drink what you need without worrying, because tomorrow's water is coming either way. Retirement savings work like the first bucket, which is why so many retirees are afraid to spend money they spent 40 years saving. Guaranteed income works like the second bucket, so the bills it covers get paid without that fear.
I call the amount you need for the basics your minimum dignity floor. Social Security covers part of it. If an annuity covers the rest, the rest of your savings can take market risk, because a bad year in the market means a smaller vacation while the power bill still gets paid.
The other reason is timing. When I started out, I worked with teachers within ten years of retirement who had every dollar of their retirement savings in the market. The closer you get to retirement, the less you can afford a 50% drop. A fixed annuity, or a fixed indexed annuity that credits interest tied to a market index but won't lose value when the index falls, takes that part of your money out of the market's reach.
Don't overdo it. Most annuities lock up your money for years, often a decade or more, with surrender charges if you take out more than the contract allows. Surrender charges are fees for leaving early. Nobody should put every dollar into one. An annuity inside an IRA also still follows the required minimum distribution rules, which make you start taking money out at a set age, so the contract has to fit around them. When I bought mine, I put part of my retirement savings toward future income and left the rest where it was. What an annuity actually is, and what you trade for it covers the tradeoffs.
An annuity's guarantee depends on the financial strength of the company behind it. I'm a licensed insurance broker, not a tax advisor, so check the tax side with your CPA.
Add up your basic monthly bills and subtract what Social Security will pay you. If there's a gap, get a quote on what an income annuity would cost to cover just that gap, and compare it with what you have saved.