How Does an IRA Work? An Individual Retirement Account (IRA) lets you save for retirement on a tax-advantaged basis—either by deducting contributions now or allowing tax-free withdrawals later. At Diversified Insurance Brokers, we help individuals understand how Traditional and Roth IRAs work, how to roll over funds from employer plans, and how to integrate annuities for guaranteed income during retirement.

Unlike employer-sponsored 401(k)s, IRAs are self-directed, giving you more control over your investment options. You can contribute earned income each year (subject to IRS limits), choose your custodian, and decide how funds are invested—often in mutual funds, ETFs, or annuities designed for retirement growth and income.

Traditional vs. Roth IRAs

• Traditional IRA: Contributions may be tax-deductible. Growth is tax-deferred, and withdrawals are taxed as ordinary income. Required Minimum Distributions (RMDs) begin at age 73.
• Roth IRA: Contributions use after-tax dollars. Growth and qualified withdrawals are tax-free, and no RMDs apply during your lifetime.

Many savers use both—deducting Traditional contributions during high-income years and contributing to a Roth when in a lower tax bracket. For those seeking predictable income in retirement, fixed indexed annuities with lifetime income riders can complement either structure.

IRA Tax Advantages and Contribution Limits

IRAs are powerful because they allow long-term, tax-advantaged compounding:

• Tax Deferral or Exemption: Traditional IRAs delay taxes until withdrawal; Roth IRAs eliminate them on qualified distributions.
• Annual Limits: For 2025, you can contribute up to $7,000 ($8,000 if 50+).
• Spousal IRA: Non-working spouses may contribute if the couple files jointly and meets income requirements.

While you can open an IRA anytime, early contributions mean more years of tax-deferred growth. Pairing this strategy with an annuity’s free-withdrawal provisions can help balance liquidity and long-term guarantees.

Rolling Over a 401(k) or Pension into an IRA

When you retire or change jobs, you can directly roll over funds from your employer plan into an IRA or IRA annuity without triggering taxes. The benefits include:

• Expanded investment choices beyond your employer’s plan.
• Continued tax deferral on your retirement savings.
• Ability to consolidate accounts and simplify RMDs.

Many clients also use a bonus annuity to offset surrender fees or market value adjustments during a rollover transition.

Turning an IRA into Guaranteed Retirement Income

As you near retirement, converting part of your IRA into a lifetime income annuity can help secure predictable, guaranteed payments. Options include:

• Immediate Income Annuities (SPIA): Start payouts right away, ideal for recent retirees.
• Deferred Income Annuities (DIA): Begin payments later for higher future income.
• Fixed Indexed Annuities: Link growth to an index with downside protection.

These products can help manage sequence-of-returns risk, provide income you can’t outlive, and offer optional beneficiary protection.

Estimate Your Lifetime Income

Roth Conversions: Tax Planning Opportunity

Strategically converting Traditional IRA dollars to a Roth IRA can create future tax-free income—especially in years when your tax bracket is lower. This is particularly useful for those expecting higher income later from Social Security or Required Minimum Distributions (RMDs). Coordinating with a fiduciary advisor can help you balance the up-front taxes with long-term benefits.

Learn more about how this complements tax-deferred annuity strategies for blended income efficiency.

Related Pages

• What Is a Direct Rollover?
• How Does a 401(k) Work?
• Tax-Deferred Annuity Strategies
• Best Fixed Indexed Annuities with Lifetime Income Riders
• Compare Annuity Options & Rates