Rolling Over a 401k Into An Annuity

Updated: Oct 4, 2019

“The question isn’t at what age I want to retire, it’s at what income.” ~ George Foreman

America has a retirement problem. If you're an avid Internet user, you must have come across reports claiming that Americans are doing terribly when it comes to retirement planning and savings.

According to Vanguard's "How America Saves 2019" report, 65 years and older workers have an average 401k account balance of $192,877 and a median 401k account balance of $58,035 at the end of 2018. If we apply the "4% distribution rule", the average annual payout comes out to be $2,321 or $193 per month, for the median balance, and $650 per month for the average balance amount.

If you are counting on social security to bridge the financial gap in retirement income, do understand that the median monthly social security payout in 2019 is $1,461, or $17,532 per annum, after cost-of-living adjustments, which is marginally above the poverty threshold for a two-member family.

If you are nearing retirement or already retired, you must create additional sources of income to stay financially afloat in your golden years. One of the primary challenges retired individuals face during the initial years of retirement is to identify the right amount of distributions they should take throughout their retired life.

As a financial consultancy, our team decided to look into annuities and how they can provide financial stability to retirement individuals.

How to achieve financial security through annuities (300)

Annuities are built for one simple purpose, to provide consistent income to the annuity holder through retirement. Shifting from a regular paycheck to social security benefits or pension is a significant change in an individual's life. An annuity provides the necessary financial support through periodic payments. Roughly 14% of individuals in 65 years and above age bracket purchase annuities for financial security during retirement.

You can purchase annuities from insurance companies, large banks, mutual fund companies, financial advisors, and boutique financial agencies that work closely with their clients. It is critical to choose an annuity provider with a proven historical record.

How to Rollover 401k Plan into an annuity tax-free

If you're about to retire or need more control over your income during retirement, buying an annuity is a positive step in that direction. You can either purchase an annuity using cash reserves or rollover an existing retirement account, such as a 401k plan or similar defined-contribution plan, to an annuity.

The IRS allows 401k account holders to rollover their tax-deferred investments into an annuity using a 1035 exchange without triggering a taxable event. However, it is critical to follow the rules laid out by the IRS for this transaction.

Steps to rollover your 401k into an annuity using 1035 Exchange

● Find an annuity provider and ask them to set up an IRA annuity for your rollover.

● Contact your employer requesting them to rollover your 401k to the insurer's annuity account. It will require proper documentation from you as well as the annuity provider. Upon the completion of the paperwork, your employer can either perform a direct transfer, depositing money directly into the annuity account, or indirect transfer, issue a check in your name.

● Some employers might issue a personal check for your 401k balance, indirect transfer. You must deposit these funds in your designated annuity within 60 days to avoid any IRS penalties. You're required to inform the IRS about the receipt as well as depositing schedule throughout this transaction. Failing to deposit these funds in a qualified annuity within 60 days could trigger up to 10% early-withdrawal penalties from the IRS. This distribution will be counted as your income, subjected to regular taxation.

● Once these funds are deposited in the annuity, your rollover transaction is complete.

Important factors to consider before buying an annuity

Choosing an annuity is an important financial decision. Here are some useful tips for making the right choice.

● Choose an annuity that fits your specific requirements. You should take into account your age, other retirement income, and health requirements while purchasing the annuity.

● Make sure you understand the annuity contract correctly. Pay special attention to management fees, surrender charges, charges for the death benefit, and emergency payouts.

Guaranteed annuities provide a steady source of income, protecting your retirement funds from volatile market conditions. Some guaranteed annuities even offer a refund to your beneficiaries after you pass away.

What kind of annuity should you choose? There are different types of annuities available in the market, including fixed-pay annuities and variable-pay annuities. Fixed-pay annuities provide a fixed income throughout your contract period and are comparatively cheaper. Variable-pay annuities are linked to equities or other market indexes and offer variable income. Their performance varies in proportion with their related index. Variable annuities cost more than their fixed-pay counterparts.

The Bottom Line

When it comes to retirement planning, we recommend retirees to maintain multiple sources of income. Having an annuity provides additional financial security during retirement. Be careful while choosing an annuity, and pay special attention to its terms and conditions. After all, you're the only one responsible for your future self.

If you have any questions or doubts about annuities, feel free to put them in the comments section. We'll be happy to answer them.


© 2019 by Jacob C Reeves, The Broke Broker.