Rolling an IRA or 401(k) into an annuity is one of the largest financial decisions a retiree or near-retiree can make. Done well, it can provide guaranteed income or protection. Done poorly, it can lock money in a product that does not fit, with fees and surrender charges you did not expect. Before you transfer a dollar, here is what to know and what to ask.
How the mechanics work
There are two common paths:
- Direct from a 401(k). Some plans allow in-plan annuity options or direct transfers to an insurer. This is not available everywhere.
- Through an IRA. You first roll the 401(k) to an IRA via a direct, trustee-to-trustee transfer, then buy an annuity inside the IRA. This is a qualified annuity.
In both cases the money should move directly between institutions. Taking a check yourself can trigger withholding and a 60-day deadline.
What an annuity changes, and what it does not
- It does not add tax deferral. The IRA is already tax-deferred.
- It does not remove required distributions. Required minimum distributions generally still apply to qualified annuities.
- It can add guarantees. Depending on the contract, this could include lifetime income, protection against loss of principal, or a death benefit.
- It adds contract costs and restrictions. Surrender charges, rider fees, and caps may apply.
What job is the money supposed to do?
People usually have one of three goals for rollover money:
- Income: a reliable paycheck for life, to cover essential expenses.
- Protection: limit exposure to market losses on money you will need soon.
- Growth with limits: modest, protected growth while preparing for retirement.
If you are not sure which goal applies, slow down. A product that serves one goal poorly may be a mismatch for another.
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Request my Retirement Income ReviewQuestions to ask about the annuity
- What is guaranteed, what is not, and for how long?
- What are all the fees, including rider charges and any annual contract fees?
- What is the surrender schedule, and what is the free-withdrawal amount?
- How does the income rider work, and is the income base different from the cash value?
- What is the insurer's financial strength rating?
- What happens to the money when I die?
- What is the free-look period?
Questions to ask about the alternative
- What would happen if I left the money where it is?
- What are the fees and options in my current plan?
- Could I do part of the rollover instead of all of it?
- How would this affect my taxes, my Medicare premiums, and my Social Security taxation?
Questions to ask the person selling it
- How are you paid on this sale, and does it differ across products?
- What products did you compare, and why did you choose this one?
- Can I see the contract, not just the brochure?
- Can I take it home and review it with my tax advisor?
A trustworthy professional welcomes these questions and does not pressure you to act quickly.
Warning signs
- Pressure to move money immediately.
- Promises of high, guaranteed returns with no downside.
- Vague answers about fees or surrender charges.
- Discouragement from consulting a tax professional or family member.
- Claims that the annuity gives you tax advantages in an IRA beyond what the IRA already provides.
Consider a partial rollover
You do not have to move everything. Some people dedicate a portion of savings to guaranteed income and keep the rest invested or accessible. Because annuity decisions are hard to reverse, starting smaller and leaving flexibility can be wise.
Related reading
Start with what to do with your 401(k), then learn how annuities are taxed and how a fixed indexed annuity works. For each account type, see every rollover account and its traps.
Take your time
A reputable carrier will give you a free-look period after you receive the contract, during which you can cancel and get your money back according to the contract terms and state law. Use that period to read the entire contract, not just the summary, and to share it with your tax professional. If anyone tells you the offer will vanish unless you sign today, that is a reason to slow down, not speed up.
How we help
Honorbrook is an independent insurance agency. We explain annuity options from multiple carriers, show you the costs and trade-offs, and encourage you to review everything with your tax professional. We do not provide investment or tax advice.
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general information and is not tax, legal, investment or financial advice. Annuity guarantees depend on the issuing company’s claims-paying ability, and surrender charges and fees may apply. A licensed agent can help with your situation.