Stabilize Retirement Income With an IRA 401(k) Annuity Rollover
- Create a predictable, guaranteed source of income for life with an IRA or 401(k) annuity rollover. Explore IRS rollover rules and potential tax implications.
Guaranteed income streams can help create financial stability when you retire. If a portion of your retirement savings is tied up in IRAs or 401(k)s, an IRA or 401(k) annuity rollover may be a good solution. It's one way to increase your predictable income, particularly if you don't have a pension.
What Is an IRA or 401(k) Annuity Rollover?
A rollover is a way to use the money in an IRA or 401(k) to purchase an annuity. Done according to IRS regulations, the rollover is usually tax-free.
Rolling IRAs and 401(k)s into annuities is a common retirement strategy. That's because annuities pay out on a regular basis, creating a guaranteed income for life. Depending on your age and employment status, you can opt to receive annuity distributions right away or in the future.
Benefits and Risks of Rolling Your IRA or 401(k) Into an Annuity
Before you do an IRA or 401(k) annuity rollover, it's important to consider the benefits and the risks.
Benefits of an IRA or 401(k) Annuity Rollover
Guaranteed income is the biggest benefit of an IRA or 401(k) annuity rollover. It makes financial planning easier; plus, you can rest assured you won't outlive your retirement savings.
Depending on the type of annuity you choose, you can also get extra death benefits, guaranteed returns or balance protection — things that aren't typically available with 401(k)s and IRAs.
Risks of an IRA or 401(k) Annuity Rollover
Annuities also come with potential risks. Some providers charge hefty fees, which can reduce your total investment and monthly distributions. If you choose a product that requires complex management and administration, such as a variable annuity, these fees can be prohibitively high.
Is there a chance you might need to withdraw money before you retire? Think carefully before you roll your retirement savings into an annuity. While traditional IRAs and 401(k)s usually come with a 10% penalty for early withdrawals, annuities make the process even more expensive. To start, the Internal Revenue Service charges you a 10% tax for withdrawing money early. The annuity provider is likely to charge additional surrender fees, which can reduce your account value quickly.
Annuities can also present a risk when it comes to the inheritance you leave beneficiaries. Make sure to read the fine print; some contracts enable the provider to absorb the remaining balance. Most 401(k)s and IRAs enable you to pass the accounts to beneficiaries, though the process and tax implications can be complicated.
How Do You Complete an IRA or 401(k) Annuity Rollover?
The rollover process takes some time — before you begin, you'll need to assess your finances and research annuity options. When you're ready to proceed, the rollover itself is relatively straightforward.
Decide How Much You Want To Roll Over
If you have multiple IRAs or 401(k)s, you can decide to roll over some or all the accounts. As you decide how much of your savings to use on annuities, consider how much money you expect to receive from Social Security and employer pensions, if any. If this amount is low, you may want to roll over a larger amount into an annuity — that way, you can create a larger guaranteed income stream in retirement.
The best rollover strategy for you depends on a number of factors, including your savings, financial status, existing investments and retirement lifestyle plans. The calculations can be complicated, so it's a good idea to work with a professional to ensure that you'll have an adequate retirement income.
Choose an Annuity
Annuity providers offer a wide range of annuities, each with different terms and varying levels of risk. Terms can vary dramatically; make sure to compare multiple quotes.
- Type of annuity: Choose from fixed, indexed and variable annuities. Fixed annuities grow at a specific rate, which provides guaranteed gains and peace of mind. Indexed annuities are linked to a market index, giving you growth potential; they also offer a minimum guaranteed rate to reduce risk. Variable annuities are tied to the investment options of your choice; they increase or decrease in value based on the performance of the portfolio. They're the riskiest, but they have the biggest potential for growth.
- Distributions: You can receive distributions from your annuity in two ways. If you're already retired, you can buy an immediate annuity, which starts sending distributions right away. If you're years away from retirement, a deferred annuity allows your money to grow tax-free. You can also decide if you want to receive distributions monthly, quarterly or yearly.
- Additional benefits: Some annuity providers allow you to add extra features to your contract, such as a guaranteed or stepped-up death benefit.
Your retirement professional can be a great help in identifying the products that match your financial goals. They can also recommend techniques such as laddering, which involves buying multiple annuities at low interest rates to maximize returns and maintain liquidity.
Select the Type of Rollover
When you're ready to complete the rollover, you can choose from two methods:
- Direct rollover: In a direct rollover, your account administrator moves the money from your IRA or 401(k) directly to an annuity.
- 60-day rollover: With this method, you make a qualified withdrawal from your IRA or 401(k) and deposit it in your bank account. Then, the IRS gives you 60 days to purchase an annuity. You might choose this method if you're already retired or if you leave the company that provided the 401(k).
To initiate the rollover process, talk to someone at the company that administers your retirement account. They can help you transfer the funds, complete paperwork and close out your original accounts.
How Does IRA or 401(k) Annuity Rollover Affect Your Taxes?
A direct rollover is the easiest way to transfer money from an IRA or 401(k) to an annuity. Since you're never in possession of the funds, the IRS doesn't charge taxes or penalties.
The tax implications for a 60-day rollover are much bigger, particularly if you don't follow the rules. You have 60 days from the day the money is deposited into your account to complete the rollover into an annuity. If you don't, the IRS keeps 20% of the funds as tax. If you're younger than 59.5, additional penalties could apply. In some circumstances, the IRS waives the 60-day requirement.
Typically, your new annuity follows the same tax rules as the original retirement account. If you're rolling over a traditional IRA or 401(k), you'll pay income tax on the annuity distributions because the accounts were funded with pre-tax dollars. Roth IRAs and Roth 401(k)s are funded by after-tax dollars — when you roll them over into a Roth annuity, you won't pay income tax on the distributions. Keep in mind that early withdrawals come with hefty penalties; it's best to wait until you're 59.5.