What’s the difference between a retirement savings account and an annuity?

When planning for retirement, it’s important to understand the difference between a retirement savings account and an annuity—and how Church Benefits Board’s in-plan annuity offers unique advantages for ministers.

Retirement Savings Accounts

A retirement savings account, like a 403(b)(9) plan, is designed to help you build wealth over time. You (and sometimes your employer) contribute money, which is then invested in funds that have the potential to grow. When you retire, you can withdraw funds as needed to cover your living expenses. This approach provides flexibility but requires careful planning to ensure your savings last throughout retirement.

Annuities

An annuity is a financial product that provides predictable, steady income in retirement. Instead of withdrawing from an investment account, you contribute money (either as a lump sum or over time), and in return, the annuity pays you a guaranteed income for a set period—often for life.

While annuities can provide valuable income security, they must be carefully considered. Once you commit funds to an annuity, access to that money is often limited, and early withdrawals can come with penalties. Additionally, annuities often have fees and restrictions that may not be suitable for everyone. It’s essential to weigh the benefits of guaranteed income against the potential trade-offs, ensuring it aligns with your overall retirement strategy and financial goals.

How does an annuity work?

There are two main phases:

• Accumulation Phase: You pay into the annuity, and your money grows tax-deferred.
• Payout Phase: At a set time (like retirement), the annuity begins paying you, either for a fixed period or for life.

There are three main types of annuities, each with different features:

• Fixed Annuity – Provides guaranteed payments, regardless of market performance. A predictable option for those who want stability.
• Variable Annuity – Payments fluctuate based on the performance of underlying investments. This offers growth potential but comes with more risk.
• Indexed Annuity – A mix of fixed and variable annuities. Returns are tied to a market index (e.g., S&P 500), but there’s some protection against losses.

Choosing the right annuity depends on your financial goals, risk tolerance, and retirement needs.

Is an annuity right for you?

Nine Questions to Consider Before Choosing an Annuity for Your Retirement Investments

It’s important to evaluate all your options carefully. Annuities can provide guaranteed lifetime income, but they’re not the right fit for everyone. Ask yourself these key questions to determine if it aligns with your financial goals.

1. What type of annuity are you considering, and why?

Annuities come in many forms—fixed, variable, indexed, and immediate—each with its own set of benefits and trade-offs. Some annuities cap potential gains in exchange for downside protection, while others expose you to market risk. Understanding the structure of an annuity is crucial before making a commitment.

2. Have you read and understood the contract?

Annuity contracts are often complex, with detailed terms that impact your access to funds, fees, and income guarantees. Be sure to read the full contract, not just promotional materials, to ensure you understand the long-term implications.

3. What types of expenses are associated with the annuity?

Many annuities have high enrollment fees, administrative costs, and commissions that reduce your overall return. CBB’s in-plan annuity, however, has an extremely low annual fee and no commissions, making it a cost-effective solution compared to other annuities.

4. What conditions must you meet to access the advertised benefits?

Annuities often promote features like lifetime income or guaranteed returns, but these benefits often come with conditions. Some require long holding periods or limit your withdrawal options. CBB’s in-plan annuity provides guaranteed lifetime income while maintaining portability within the CBB plan, giving you flexibility should your circumstances change.

5. Can I roll over my annuity investments if my needs change?

Many annuities have strict surrender periods, making it costly to move your money. Within the CBB plan, however, our annuity offers greater portability, allowing you to keep your retirement savings within our system without penalties.

6. How do performance “floors” and “caps” affect my returns?

Some annuities limit potential gains in exchange for downside protection. With CBB’s in-plan annuity, you benefit from upside potential with downside protection, ensuring stability while still allowing for growth over time.

7. How are annuity income and principal taxed?

Many annuity distributions are taxed as ordinary income, which can be higher than capital gains tax rates. For ordained ministers, only retirement benefits from a church plan like CBB’s can be designated as a housing allowance, allowing for tax-free withdrawals used for housing expenses—a distinct advantage over other annuities.

8. What impact will inflation have on my annuity income?

Fixed annuities provide level income, but inflation can erode purchasing power over time. CBB’s annuity provides guaranteed income while allowing for market-based growth, helping to counteract inflation.

9. How will the annuity affect my beneficiaries?

Some annuities offer little to no benefits to heirs, and certain payout structures may leave remaining funds with the insurer instead of your loved ones. Be sure to evaluate the impact on your estate planning goals.