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Tax-Free Savings vs. Retirement Annuity: Which is Better For You?

If you live in Canada, you should take advantage of a TFSA, or tax-free savings account. It’s not really a savings account, but rather an investment account. You can invest in stocks, bonds, EFT’s and cash. You invest your after-tax income in the account, and then withdrawals are tax-free. 

If you live in the United States, you don’t have access to a TFSA—a Roth IRA offers similar benefits, it was launched to offer Americans a great option to save for tax-free retirement income. Or you could consider a retirement annuity. Both of these accounts provide tax benefits, and both could be considered part of your retirement investment portfolio. 

What is a Retirement Annuity?

A retirement annuity is an insurance product that provides income to the owner, either monthly, quarterly, or annually. Money invested in an annuity grows tax-deferred until you withdraw it. This can provide guaranteed income for you in retirement. With Social Security benefits paying only an average of $1,503 a month, that doesn’t go very far. A retirement annuity could provide some extra income to supplement your retirement. 

There are different types of annuities to choose from.

Fixed annuity: Fixed annuity provides a set payment over a set period of time

Variable annuity: Variable annuities invest in a portfolio of investments that you choose, and then the amount you receive depends on the performance of the investments.

Fixed-indexed Annuity: Similar to indexed universal life insurance, the investments are tied to market performance based on an index like the S&P 500.

>>MORE: Should I Invest in S&P 500 Index Through an Indexed Universal Life Insurance (IUL) Policy?

There are also different ways to distribute the money. 

Immediate Annuity: You pay a lump sum payment into an annuity and a month or so later start receiving payments. Since you buy these with after-tax income, only the amounts earned on the investments are taxed when you withdraw. 

Deferred Annuity: In this annuity, you pay a lump sum payment into an investment account. The money grows over time, and when you retire you start receiving payments. 

Pros and Cons of Retirement Annuities

– Guaranteed source of income in retirement
– Funds are tax-deferred until you start receiving payments
– Guaranteed return on investment
– Your heirs may get a death benefit
– No contribution limits 
– Can be jointly owned
– Fees can be high
– There are surrender fees if you back out of the contract
– You won’t be able to withdraw money until you’re at least 59.5, or you’ll pay penalties (typically about 10%)
– Investment options may be limited

What is IRA? And Why is It Good for Retirement Savings?

Individual Retirement Accounts were developed after fewer and fewer companies offered pensions. An IRA offers a tax-deferred way to save for retirement, as you’re investing pre-tax money. You’ll pay taxes on the withdrawals, but the money grows tax-free until then. 

An IRA is not actually an investment—it’s an account where you hold investments, such as stocks, bonds, mutual funds or whatever you want to invest in. There is some risk involved, as the investments you choose may not provide the return you were hoping for and could possibly lose money in certain years. 

How is Roth IRA Different from IRA?

A Roth IRA is also an individual retirement account, except that you make contributions to it with after-tax dollars. Since you already paid taxes on the money, withdrawals are completely tax-free. For high income earners, this is a significant benefit since it can help save 20-30% of your income in retirement years from paying federal and state income tax when you withdraw from your Roth IRA account. This is also a unique advantage of a Roth IRA account over other retirement savings and investment account like 401K or investment brokerage accounts that you may have at Vanguard or Charles Schwab.

Withdrawing from the cash value account in permanent life insurance policies also offers the same benefit, completely tax-free. The best policy for this purpose is Indexed Universal Life Insurance or IUL. The cash value account in IUL policies earns high interest rate tied to the performance of a market index, usually S&P 500 while being protected from the market downside thanks to floor rate of 0-2%. When withdrawing from IUL policies to support retirement income, policyholders enjoy tax-free advantage. They don’t have to pay any penny in income tax.

>>MORE: Should I Invest in S&P 500 Index Through an Indexed Universal Life Insurance (IUL) Policy?

>>MORE: How Much Income Tax Will You Have to Pay in Retirement? A Case Study

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

Pros and Cons of IRA and Roth IRA for Retirement Savings


  • Both Roth and traditional IRA’s offer a tax-advantaged way to save for retirement
  • You choose the investments
  • You may be able to take early withdrawals, but only in certain circumstances


  • There are limits to how much you can contribute to an IRA—for 2020 the maximum amount you can contribute is $6,000 or $7,000 if you’re older than 50
  • If you earn a high income, you can’t contribute to a Roth at all. Learn more about Retirement Savings Strategies for High-Income Earners
  • You can start taking withdrawals at age 59.5
  • You must start taking withdrawals at age 70 if you turned 70 before 2019, or 72 if you haven’t
  • You must have a Roth IRA for at least five years before you can start withdrawing from it

Compare IRAs with Retirement Annuities

With fairly low contribution limits for IRA’s, it’s entirely possible to reach the contribution limits for either a traditional or a Roth. After you’ve maxed out your IRA, you’ll have to find new ways to invest your money. An annuity has no limits on the amount you can contribute, so you could invest as much as you want. Annuities carry fees, though—fees for the management of the annuity, surrender charges, and fees for any riders you may want to add. 

IRA’s don’t have large fees, but they do carry penalties as well if you try to withdraw the money early.

With an IRA, the investments are up to you. If you’re confident in your investment savvy, it gives you more control. In an annuity, you can choose from a limited number of investments, but you don’t have complete freedom. If you are not a savvy investor, leaving the investment decisions in the insurance company’s hands may appeal to you.

You could purchase an annuity with the money from an IRA, in which case the payments would be taxable. If you purchase an annuity with Roth IRA money, you won’t pay taxes on the principal, just on the earnings.

You could also house an annuity inside of a Roth IRA, in which case the rules for the IRA take precedence over the rules for the annuity. It can get very complex, especially from a tax standpoint. 

Quaranteed and Permanent

Yes. Guaranteed Universal Life Insurance (GUL) provides the same guaranteed and permanent coverage for less than half the cost of Whole Life Insurance premiums.

Last Thoughts

If you’ve maxed out your IRA, you’ll need to consider other ways to supplement your retirement, since Social Security benefits are modest. An annuity could work for you by providing tax-free payments if you bought the annuity with after-tax funds. In addition, annuities can occupy a spot in a savvy investor’s portfolio. 

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