Many American workers have assets in one or more employer-sponsored retirement plans (i. e. , 401(k), 403(b), profit-sharing plans) to help save for the future. But what happens if you change jobs? These accounts don’t always follow you, so people put them off until later. In fact, about 1 in 5 U.S. S. workers have left behind or forgotten retirement accounts.
You can still make the money in the account grow, but if you leave your job, the account is usually thought of as inactive. And if you experience several job changes throughout your career, you could find yourself trying to keep track of several accounts. This could make it difficult to know if you’re on track with your retirement savings goals and ensuring you’ll have enough income down the road. One option to help you stay in the driver’s seat is to roll over your non-contributing 401(k) into a fixed indexed annuity (FIA).
Is Transferring Your Retirement Savings to an Annuity the Right Move?
Thinking about what to do with your 401(k) when you leave your job or approach retirement? You’re probably wondering if rolling it over to an annuity is a smart financial move. This question comes up a lot in my conversations with readers, and honestly, the answer isn’t straightforward – it really depends on your personal situation and retirement goals.
I’ve seen people make this decision without fully understanding the implications, so I wanted to create this comprehensive guide to help you navigate this important financial crossroad.
What is a 401(k) and What is an Annuity?
Before diving into whether you should move your 401(k) to an annuity, let’s clarify what each of these retirement vehicles actually is:
401(k) Plan
A 401(k) is an employer-sponsored retirement plan that allows you to save money for your future with potential tax benefits. These plans are typically only accessible through an employer, though self-employed individuals can establish their own version. The primary purpose of a 401(k) is building up savings until you have enough resources to retire.
Annuity
An annuity is a contract between you and an insurance company in which you invest a lump sum (or make regular payments) and then get payments at set times while you’re retired. If you set up an annuity the right way, it can give you a steady monthly income for life after you retire. Annuities come in several varieties .
- Fixed annuities: Provide guaranteed payments
- Variable annuities: Payments vary based on investment performance
- Indexed annuities: Tied to market index performance
The Appeal of Rolling Your 401(k) Into an Annuity
So why would someone think about putting their 401(k) money into an annuity? There are good reasons for this.
Guaranteed Income Stream
The biggest selling point of annuities is their ability to provide guaranteed income for life. This can offer peace of mind, knowing you’ll receive regular payments regardless of how long you live.
Structured Retirement Planning
Annuities can help create a predictable income strategy, which some retirees find comforting compared to managing a portfolio of investments.
Additional Features
Some annuities come with death benefits, guaranteed withdrawal options, or different types of income streams that could help you reach your retirement goals.
The Risks and Drawbacks You Should Know About
But before you rush to make this move, you should be aware of several significant risks and downsides:
1. Extra Fees Can Eat Away at Your Savings
Annuities often come with a host of fees that can significantly reduce your retirement funds:
- Management and administrative fees: Typically 1-3% annually
- Mortality and expense risk charges: To offset the insurance company’s risk
- Sales commissions: Often built into the product
- Contract fees: One-time upfront costs
- Surrender charges: Can start at 15% or higher if you want to withdraw early
These fees might seem small individually, but they compound over time and can drain your retirement savings substantially.
2. Risk of Loss to Your Estate
Unlike a 401(k), which can be passed to your beneficiaries if you die before using all the funds, some annuities don’t offer this option. This means the insurance company might keep whatever remains of your investment if you die early.
There are a lot of annuities that let you transfer to a spouse or give death benefits, but these features usually cost extra.
3. No Additional Tax Benefits
Insurance companies often highlight the tax-deferred growth of annuities as a major benefit. However, this is misleading for 401(k) rollovers because your 401(k) funds are already tax-deferred! Rolling to an annuity provides no additional tax advantage in this case.
4. Limited Access to Your Money
Once you’ve annuitized (started taking payments), you typically can’t change your mind or access your principal in a lump sum. This lack of flexibility can be problematic if your financial needs change.
5. Time Limits and Tax Implications
If you don’t execute the rollover properly within 60 days, you risk forfeiting 20% of your balance to taxes. Any amount not rolled over becomes taxable as ordinary income, potentially causing a substantial tax hit.
When Should You Consider a 401(k) to Annuity Rollover?
Despite the drawbacks, there are circumstances where this move might make sense:
Approaching or In Retirement
If you’re nearing or already in retirement and are concerned about having reliable income, an annuity might provide the security you’re looking for.
Looking for Lifetime Income Guarantees
If running out of money in retirement is your biggest worry, the guaranteed income aspect of annuities might be worth the extra costs.
Complementing Other Retirement Income Sources
Annuities can work well as part of a diversified retirement income strategy, especially if you want to ensure basic expenses are covered by guaranteed income.
Limited Pension Benefits
If you don’t have a traditional pension providing regular income, an annuity can serve a similar function in your retirement plan.
When Should You Avoid Rolling Your 401(k) to an Annuity?
There are definitely situations where keeping your money in a 401(k) or rolling it to another type of account makes more sense:
You’re Far From Retirement
If retirement is many years away, the fees associated with annuities will have a much bigger negative impact over time.
You Value Flexibility
If you want to maintain control over your investments and potentially access your money without penalties, an annuity may be too restrictive.
You Have Substantial Other Guaranteed Income
If you already have significant pension or Social Security benefits that cover your basic needs, adding an annuity might be unnecessary.
You Have Major Planned Expenses
If you anticipate needing to withdraw substantial sums for major expenses (like healthcare costs), an annuity’s withdrawal limitations could be problematic.
Your Employer’s 401(k) Has Great Features
Your current 401(k) might offer benefits worth keeping, such as:
- Lower fees than retail investment options
- Unique investment options
- Loan provisions
- Penalty-free distributions if you leave your job after age 55
Alternative Options to Consider
Instead of jumping straight to an annuity, consider these alternatives:
Check if Your 401(k) Already Offers an Annuity Option
Thanks to the SECURE Act, more employer plans are including annuity options within 401(k)s. These have better portability features and potentially lower costs than retail annuities.
Roll Over to an IRA
Rolling your 401(k) to an IRA gives you more investment choices and flexibility while maintaining tax advantages.
Partial Rollover
You don’t have to move all your funds to an annuity. Consider a partial rollover to create a baseline of guaranteed income while keeping the rest invested for growth.
Delayed Annuity Purchase
You could roll your 401(k) to an IRA now and purchase an annuity later when you’re closer to needing the income.
How to Execute a 401(k) to Annuity Rollover (If You Decide It’s Right for You)
If after weighing all factors, you decide an annuity is appropriate, here’s how to do it right:
1. Arrange a Direct Rollover
To avoid tax complications, set up a direct trustee-to-trustee transfer. This means your 401(k) funds go directly to the insurance company offering the annuity without passing through your hands.
2. Complete the Process Within 60 Days
If you do receive the funds personally for any reason, you must complete the rollover within 60 days to avoid potential tax penalties.
3. Compare Different Annuity Products
Not all annuities are created equal. Shop around and compare:
- Fees and expenses
- Payout rates
- Death benefit options
- Inflation protection features
- The financial strength of the insurance company
4. Check the Insurance Company’s Financial Rating
Remember that annuity guarantees are only as good as the company backing them. Check ratings from agencies like Standard & Poor’s and AM Best before committing.
Real-World Perspective
I talked to my friend Mark recently who faced this exact decision when he left his job of 20 years. He was tempted by the guaranteed income pitch from an annuity salesperson but ultimately decided to roll his 401(k) to an IRA instead. His reasoning? “The fees were just too high, and I didn’t like the idea of locking up my money when I’m still figuring out what retirement will look like for me.”
On the flip side, my aunt Carol moved about 30% of her retirement savings to a fixed annuity. She loves knowing that between Social Security and her annuity payments, her basic living expenses are covered no matter what happens with her other investments.
Final Thoughts: Is Moving Your 401(k) to an Annuity Right for You?
There’s no one-size-fits-all answer here. The right decision depends on your:
- Age and proximity to retirement
- Other income sources
- Risk tolerance
- Need for guaranteed income
- Desire for flexibility
- Estate planning goals
Before making any decision, I strongly recommend consulting with a financial advisor who isn’t trying to sell you an annuity. They can provide objective guidance based on your complete financial picture.
Remember, purchasing an annuity with your 401(k) money isn’t an either/or decision. You can have both types of retirement vehicles, and a well-designed income strategy might combine their strengths along with other solutions.
Have you considered moving your 401(k) to an annuity? What factors are most important in your decision? I’d love to hear your thoughts in the comments below!
Protection from market downturns
Since a FIA does not directly participate in any stock or equity investments, your principal is protected from loss due to market downturns. Although you may earn zero percent interest in any given term period, you’ll never earn less than zero. In exchange for this protection, indexed crediting strategies limit the interest you can receive, which may include a Cap Rate, an Annual Spread, and/or a Participation Rate.
Although living a long life in retirement can be a blessing, it can also be hard to make sure you have enough money to last. An annuity can create a guaranteed stream of income in retirement and supplement income from Social Security, retirement plans and other savings vehicles. If you choose a FIA, it may include or offer optional riders that provide lifetime income, so you can be protected from outliving your savings and can gain greater peace of mind about your future financial well-being.
FIAs can have an income rider that offers extra benefits, like protection against inflation, a death benefit, or living benefits for confinement or terminal illness. These benefits can be added to the guaranteed lifetime withdrawals. 4. You can usually get at least some of your money out of your account without having to pay a withdrawal fee.
Benefits of an annuity
When you make contributions to a 401(k), you will not owe taxes on these funds or any earnings in the account until you withdraw the money. A FIA can also provide tax deferral and growth potential, along with insurance against the risk that you’ll outlive your money after you retire. They give you the potential to grow your retirement savings, help manage the risk of loss due to market downturns and can create a guaranteed income stream for the rest of your life.
A fixed indexed annuity can provide the added benefits of:
- Protection from loss due to market downturns
- Guaranteed lifetime income1
- Flexibility to customize income
- Creating a legacy
Rolling over tax-qualified retirement assets into an annuity can help you achieve your retirement goals, while also providing you with additional features for creating a well-rounded financial plan. Let’s take a closer look at each of these benefits.
A fixed indexed annuity has the potential to grow your money while also helping manage the risk of loss. It offers growth potential based, in part, on the upward movement of an external market index.2
Rolling over your 401(k) is tax free as long as you follow IRS guidelines. You won’t pay taxes on any growth in your annuity until you’re ready to withdraw money, typically when you reach retirement.3
401k Rollover to an Annuity
FAQ
What does a $100,000 annuity pay per month?
Is it better to have a 401k or an annuity?
Payout Structure and Inflation Risk Some annuities offer inflation-adjusted payments, but these typically come at a higher cost. A 401(k), on the other hand, gives you more freedom over how and when to take out your retirement funds, and by investing in a variety of things, it may even give you more options for dealing with inflation.
What is the biggest disadvantage of an annuity?
The biggest problems with annuities are that they are hard to get money out of because they have high fees and penalties for taking money out early, and they are also hard to understand, which can lower long-term returns by a lot.
What does Suze Orman say about variable annuities?
Variable annuities in IRAs/401(k)s: Often high fees and redundant tax deferral if money is already in a tax-advantaged account. Too complicated indexed contracts: If the cap, participation rate, spread, and surrender terms are hard to understand, it’s probably not a good fit.
Can a 401(k) be rolled into an annuity?
Yes. Partial rollovers are allowed. You could transfer part of your 401 (k) into an annuity for guaranteed income and leave the remainder in your 401 (k) or roll it to an IRA for continued investment. Will I lose money if I die early after rolling my 401 (k) into an annuity? Yes, possibly.
Is rolling a 401(k) into annuity a smart move?
Immediate Answer: A clear verdict on whether rolling a 401 (k) into an annuity is a smart move, with key benefits and drawbacks laid out. Avoid Costly Mistakes: Common pitfalls to avoid during a 401 (k)-to-annuity rollover (like tax traps and high fees) and how to sidestep them.
Can I transfer my 401(k) into an annuity?
While transferring your 401 (k) into an annuity can avoid immediate tax implications, future withdrawals from the annuity will be subject to income tax. Also, unlike 401 (k) or IRAs, annuities do not offer any additional tax advantages. Annuities often have restrictions on withdrawals, especially during the early years of the contract.
Should you annuitize your 401(k)?
This helps ensure you get a competitive rate and an annuity that fits your needs, rather than a one-size-fits-all sales product. Putting all your 401 (k) money into an annuity: It’s usually a mistake to annuitize your entire nest egg. You might need liquid savings for emergencies or big expenses.
How do you rollover a 401(k) into annuity?
Essentially, there are two ways to execute a rollover — directly through a transfer or indirectly through a qualifying withdrawal. Rolling over your IRA or 401 (k) into an annuity can be done tax-free, offering a steady retirement income stream.
Should I lock my 401(k) into an annuity?
If you crave a guaranteed monthly income for life and worry about outliving your savings, an annuity rollover could be very beneficial. On the other hand, if you want flexible access to your money or hope to leave a financial legacy to your heirs, locking your 401 (k) into an annuity might not be the best move.