1. Resources>
  2. Annuities 101>
  3. Should I Put my 401k into an Annuity?

Should I Put my 401k into an Annuity?

Nov 13, 2023

Blueprint Income Team

Rolling your 401(k) – or a portion of it – into an IRA annuity or a qualified longevity annuity contract (QLAC) can be a smart move for those looking for guaranteed income during retirement. If you're considering this option, there are a few things to keep in mind to ensure it's the right decision for your financial goals.

Why move your 401(k) funds into an annuity?

Rolling money from a 401(k) into an annuity involves a rollover IRA when you purchase a deferred annuity or a QLAC when you purchase an income annuity. The annuity you purchase can provide you with a guaranteed source of income during your retirement years, which offers peace of mind if you're worried about outliving your savings.

Annuities come in different types, so it's important to do your research to find the right fit for your needs. For example, the purpose of an income annuity is to provide you with guaranteed lifetime monthly income, while the purpose of a deferred annuity is to accumulate funds and give you the option to annuitize (create guaranteed lifetime income) at some point in the future.

One of the biggest advantages of rolling over your 401(k) funds into an annuity is the ability to control the terms of the contract. Unlike a 401(k), which may have limited investment options, you have the flexibility to structure your annuity based on your retirement needs. Like 401(k)s and other qualified retirement plans, annuities are tax-deferred, meaning you won't have to pay taxes on your investment until you withdraw the funds.

When does it make sense to move your 401(k)?

Moving your 401(k) funds into an annuity can make the most sense if you're close to retiring. This is because an annuity provides you with a guaranteed source of income at some point in retirement. It can also help you diversify your retirement portfolio and have peace of mind during your golden years.

Annuity vs 401(k)

When comparing annuities to 401(k)s, both options have their advantages and disadvantages. A 401(k) offers the potential for investment growth through compounding interest and returns, but a deferred annuity can also provide for growth before annuitization. Additionally, annuities provide steady income during retirement, and some variable annuities may offer more flexibility in terms of investment options and contract terms. It's important to keep in mind that withdrawals from both 401(k) and annuities are subject to taxes, and you should consult with a financial advisor to ensure you're making the best decision for your financial goals.

Features of an annuity

Here are a few features of an annuity to fund your retirement:

  • Guaranteed income: An annuity can provide a guaranteed income stream in retirement.
  • Protection against market volatility: Some annuities are not directly tied to the equity or bond markets, so they offer protection against market downturns and volatility.
  • Control: Annuities can be structured based on your individual retirement needs and goals.
  • Tax-deferred growth: Funds invested in an annuity are tax-deferred, meaning you won't pay taxes on the gains until you withdraw the funds.

Potential disadvantages of an annuity

One potential disadvantage of an annuity is that some may offer lower returns compared to other investment opportunities. Bear in mind, though, that these returns are guaranteed, and the longer your guarantee period, the higher your return tends to be.

Another possible downside is that annuities may be less liquid than other investment options, meaning you may not be able to access your funds until a certain time. Not all annuities are equal in this regard, however, as deferred (fixed, indexed, variable) annuities provide a moderate level of liquidity compared to income annuities.

How to roll over a 401(k) to an IRA annuity upon retirement

Rolling over a 401(k) into an annuity can be a simple process that can be done in a few steps. You can transfer your retirement account to an annuity by directly moving your funds from your 401(k) to the annuity. This process involves signing a few documents and the transaction can be completed by requesting the transfer. Alternatively, you can opt for a qualifying withdrawal, which involves liquidating your retirement account, taking control of the funds, and then moving the total value of the funds withdrawn into an annuity within 60 days to avoid penalties or tax liability.

It's always a good idea to review your retirement goals and consult with a financial adviser before putting your 401(k) into an annuity. While moving your 401(k) account into an annuity typically has no tax implications, you should still consider the tax impacts of withdrawing funds from both instruments when planning your retirement strategy.

Adding an annuity to your retirement plans

It's important to note that you don't have to transfer the full value of your 401(k) into an annuity. You can withdraw only a portion of your retirement savings to help diversify your investment strategy. This strategy allows you to benefit from a 401(k) and an annuity while reducing the risks of each investment option.

When you compare an annuity vs. a 401(k), both offer pros and cons worth considering. An annuity is a great way to prepare for retirement while diversifying your investment portfolio and a 401(k) allows you to benefit from employer matching. Both investment types can be advantageous to a strategic retirement plan.


Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.


Can I Retire?

Jan 18, 2024

Blueprint Income Team

Thumb - Can I Retire?