- You can use the funds in your 401(k) to buy an individual retirement account (IRA) in an annuity or other product.
- Annuities can offer guaranteed payments in retirement, but they also may have drawbacks—like charges and fees, and in some cases, no death benefit for your beneficiaries.
- Since your 401(k) is already tax-deferred, there is no additional tax advantage to buying an annuity with your rollover.
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.
What is an annuity?
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
What is a 401(k)?
Should you buy an annuity with your 401(k) rollover?
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.
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:
When should you buy an annuity your 401(k) balance?
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,
When shouldn't you buy an annuity with your 401(k)?
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.
A well-designed income strategy might combine the strengths of annuities and 401(k)s as well as many other solutions.