Annuities
Rolling a 401(k) or IRA into an annuity
When you leave a job or retire, you decide what happens to your 401(k). Moving it into an annuity is one option. Done the right way, it's not a taxable event. Done the wrong way, it can cost you 20% up front.
Your four choices
- Leave it in your old employer's plan, if the plan allows it.
- Move it to your new employer's plan, if you're still working and the plan accepts rollovers.
- Roll it into an IRA, which can hold investments or an annuity.
- Cash it out. The whole amount is taxed as income, and before age 59½ there's usually a 10% penalty too. For most people, this is the costly choice.
Direct rollover, not a check to you
In a direct rollover, your plan sends the money straight to the new IRA custodian or insurance company. Nothing is withheld and nothing is taxed.
If the plan instead sends a check made out to you, it must withhold 20% for taxes. You then have 60 days to deposit the full amount, including the 20% you didn't receive, or the shortfall is taxed as a withdrawal. Asking for a direct rollover avoids all of that.
Moving an IRA from one provider to another works the same way. A direct trustee-to-trustee transfer can be done as often as you like. A rollover paid to you is limited to one every 12 months across all your IRAs.
Does an annuity make sense inside an IRA?
An IRA is already tax-deferred, so an annuity doesn't add any tax benefit there. The reasons to use one inside an IRA are the other things it offers: protection from market losses, a guaranteed rate, or income for life. If none of those matter to you, an annuity probably isn't the right fit for that money.
Required minimum distributions still apply to an annuity held in an IRA. Most contracts can calculate and pay your RMD each year, and RMD withdrawals usually don't count against your free-withdrawal amount.
Still working?
Many 401(k) plans allow an in-service rollover once you reach 59½, so you can move part of your balance while you're still employed and contributing. Whether yours does depends on the plan, so check with your plan administrator or ask me to help you find out.
How the move works
- We choose the annuity and complete the application as an IRA.
- You request a direct rollover from your plan, or I send transfer paperwork for an existing IRA.
- The money moves straight to the insurance company, made out for your benefit.
- You receive your contract and confirmation.
Rollover rules have exceptions. Talk with a tax professional about your situation before you move retirement money.