Should I Rollover My IRA or 401(k) Into an Annuity?
You can rollover your IRA or your 401(k) into an annuity, but the big question is this: should I?
Before you can make an educated decision about transferring money from a 401(k) to an annuity, there are a few variables we need to look at:
- What type of annuity are you considering?
- Are you done contributing to your 401(k)?
- Are you retired?
- Do you know how much money you might need in the need future?
- Do you have a trusted advisor?
We will answer all of these questions, but first, we want to make sure we’re all on the same page. So, what exactly is a 401(k)? And what is an IRA? Does the type of IRA – Traditional, Simple, or Roth – change the decision making process?
What is a 401(k)?
A 401(k) is a retirement savings plan that your employer often contributes to. It’s actually named after a section of the tax code (in case you were curious!).
A 401(k) helps employees save a portion of their pre-taxed paycheck for retirement.
Most 401(k) plans offer a spread of mutual funds, but this can vary. There are caveats to having a 401(k), such as being unable to use any of that money for a certain amount of time (also called vesting), and rules about withdrawing your money before retirement age (and fees).
What is an IRA?
An IRA, or Individual Retirement Account, is exactly how it sounds – it’s just a retirement account.
Most IRAs are Traditional IRAs. This just means that the money in the retirement account is pre-taxed.
Another type of IRA is a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees (say that 5 times fast!). With a SIMPLE IRA, both the employer and employee contribute to a Traditional IRA. This type of IRA is best suited for small employers who can’t afford conventional retirement plans, but they still want to help their employees save for retirement.
Finally, there are Roth IRAs, which are less common. With a Roth IRA, you put taxed dollars (money that has already been taxed) into the account so that when you retire, and you start taking that income, you don’t get taxed. It’s basically a case of ‘get taxed now rather than later.’
What Type of Annuity Should I Rollover My 401(k) or IRA Into?
Many of the articles on the web are discussing what is called a variable annuity.
You can read about annuity types in more detail in Should I Buy An Annuity For Retirement?
We do not recommend looking at variable annuities at all due to things like extra fees and the risk of losing your money.
We recommend fixed annuities, which are guaranteed contracts, meaning there aren’t any fees and there’s no risk of losing your money. Current fixed annuities will give you between 3-4% interest on your money, but this is subject to change.
The agents here at Medicare Allies would only consider recommending a fixed annuity – never a variable annuity!
Benefits of Rolling Over a 401(k) or IRA Into an Annuity
There are 2 major benefits of rolling a 401(k) or IRA into a fixed annuity:
- You have someone looking out for your investment
- Your retirement savings are safe and secure
Once you retire, no one is contributing to your 401(k) any longer. What happens at this point is that no one is looking out for your investment. Your 401(k) might do well, but it might not. Oftentimes, you’ll get a monthly statement in the mail, and you’ll have no idea what it’s even saying.
Having a more hands-on approach with a qualified agent gives a ton of clarity and peace of mind. After all, this is your life’s savings! You want to know that it’s being taken care of.
The second benefit is safety. When you retire, you’re moving from an accumulation stage to a preservation stage. When we move into the preservation stage, we have to adjust our investment strategy.
You want to be more conservative and put safety as a higher priority over risk. Safety first, competitive interest rates later.
Keep in mind that the current interest rates on fixed annuities are some of the highest we’ve seen in recent years, so don’t think you’re trading off competitive interest rates altogether.
One Risk of Rolling Your 401(k) or IRA into an Annuity
If you don’t know how much money you might need in the near future, it’s risky to put your money into an annuity.
Since an annuity is a guaranteed contract, that money would be locked up for a few years (5 years it the most common contract length).
Even though you can have a 10% free withdrawal, it may or may not be enough to cover your expenses.
For example, if you want to buy a new car and you need more than 10% of your investment, that would be a big drawback.
Are Annuities Subject to Required Minimum Distributions (RMDs)?
When you turn 70 ½, you are required to take out a Required Minimum Distribution (RMD) on any retirement savings account (IRAs, 401(k)s, etc.).
The money in your retirement account is pre-taxed with the understanding that you’ll start withdrawing at 70 ½. Why? Because the government wouldn’t let you get away without ever paying taxes on that money.
So, once you turn 70 ½, those withdrawals must begin no later than April 1 of the following year.
Keep in mind that you do have to take withdrawals, but you don’t have to spend it. The RMD starts at 3.65%, and it increases a little bit each year. You can see how the RMD increases with age in the following chart:
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Now, one important thing to note here is that you only have to take out the Required Minimum Distribution (RMD) on pre-taxed money. That’s the whole purpose
of the RMD existing.
So, if you’re starting up an annuity with money that has already been taxed (say, money from your savings account or a Roth IRA), you don’t need to pay attention to the RMD.
Is Rolling a 401(k) or IRA Into a Fixed Annuity a Taxable Event?
If you roll your 401(k) into a fixed annuity, it’s a non-taxable event, because you’re not withdrawing the money for yourself – you’re just transferring it from one retirement vehicle to another.
It’s not considered a distribution – you’re simply saying that you want your 401(k) to be rolled over to another financial institution, which means it’s still tax-deferred.
Will I Lose Some of My 401(k) or IRA Money If I Have an Agent?
Commission is often a point of concern, because many people think they’ll have to pay a fee for it. With fixed annuities, this is not the case.
One hundred percent of your account value earns a guaranteed interest rate. You will never ever see a fee taken out of your account value for commission. Basically, you will never see anything that reduces your account value because you have an agent.
Do You Have a Trusted Advisor or Agent?
Moving your life savings from one account to another is a huge event – you need to make sure you have a trusted advisor or agent to help.
A great agent will walk you through the entire process. Our agents here at Medicare Allies have helped hundreds of individuals move their retirement savings into the safety and security of a fixed annuity.
Contact us if you’re recently retired or have stopped contributing to your retirement savings account. We can show you your options to ensure that your retirement is as hassle-free and predictable as possible.
Medicare is confusing. The more you seek out information, the more overwhelmed you feel. You're definitely not alone.
We work with your best interest in mind, so while the decision will always be up to you, you’ll be empowered with knowledge that you can really understand and get behind.
At Medicare Allies, you aren’t just another transaction or a number in a system. You are an individual, and we will continue to develop a relationship with you and be there for you when you need us in the future.
So don't be shy – let us serve you.