Should you consider a 401(k) rollover to an annuity? (2024)

An array of possibilities awaits you when you're creating your retirement income plan. You might feel overwhelmed by the alphabet soup of investments available, but each one offers particular advantages that are worth highlighting. Two popular options include annuities and 401(k)s. They're different—one is a product and one is a plan—but you might find they work together well.

Many people have a 401(k) with an employer, and when you leave your job, you may take that investment with you. You might wonder, "should I roll over my 401(k) to an annuity?" This can be a solid idea, but let's look at what it entails before you decide.

An annuity is a contract with an insurance company in which you invest a lump sum (or set up regular contributions) and then receive timed distributions throughout your retirement. When set up wisely, you can use an annuity to have a stream of monthly income that lasts through your retirement years. Income planning is where annuities really shine.

You also can leave money in an annuity contract for an extended period without taking income. In the event you don't need that money as part of your income, you could use a deferred annuity to invest for the future. Some contracts even have the potential for market exposure and include other features.

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, but self-employed people also may establish one. A 401(k) plan typically is used for building up savings until you have enough resources to stop working.

You have several options for what you want to do with your 401(k) investment savings after leaving your employer. You can:

• Leave the money in your employer's plan, if allowed.
• Roll the money over to an individual retirement account (IRA) in an annuity, mutual fund or other investment product.
• Cash out your investment and pay any taxes due.

Let's look closer at the annuity route. "Direct rollover" is the phrase commonly used when you're using the money you have in your 401(k) plan to buy an IRA in an annuity. To do this, you have your employer move your 401(k) balance directly to the insurance company where you have set up your IRA annuity. You'll use the money from one retirement plan to buy another without anything being distributed to you. You typically can request this transfer through your former employer or the company that holds your 401(k) by providing information about the receiving IRA annuity. By performing a direct rollover in this way, you avoid the mandatory tax withholding that would apply if you received the money first.

However, pulling funds out of a 401(k) to open an annuity may or may not be the best option for you. Here's a look at both sides:

In some cases, moving your retirement savings from a 401(k) plan to an annuity is an excellent idea, particularly if you're concerned about running out of money in retirement. As noted, an annuity's regular income stream can help you have money coming into your household for as long as you're alive.

Annuities can provide features, such as death benefits, guaranteed withdrawals or several types of annuity income streams.

There may be benefits to leaving your 401(k) balance in your employer plan if allowed:

• You will continue to benefit from tax deferral.
• There may be investment options unique to your plan.
• Fees and expenses may be lower.
• There is a possibility for loans.
• Distributions are 10% federal tax penalty-free if you terminate service after you turn 55.

Also, if you intend to spend a substantial amount of your savings early, an annuity might not be a good fit. The surrender periods and long-term nature of annuity strategies are best suited for those who leave the majority of their money in an annuity for an extended period. So, if you're planning for immediate major expenses, research your options carefully.