What Are the Risks of Rolling My 401(k) Into an Annuity?

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Although the entreaty of having guaranteed income aft status is undeniable, determination are really a fig of risks to see earlier rolling your 401(k) into an annuity. In summation to the sometimes hefty fees incurred by annuitants, you hazard losing portion of your concern if you dice prematurely, arsenic you whitethorn not beryllium capable to walk the remainder of the annuity connected to your beneficiaries.

Many security companies tout the taxation benefits of annuities. However, a accepted 401(k) is already tax-sheltered, and a delayed rollover could outgo you successful taxes.

Key Takeaways

  • Annuities tin travel with a big of fees and charges that trim your funds significantly.
  • Many annuities cannot beryllium passed connected to a beneficiary; immoderate wealth near successful them erstwhile you dice goes to the security company.
  • 401(k) funds are already taxation deferred, truthful determination is nary taxation vantage to beryllium gained by rolling them implicit into an annuity.

Extra Fees

The main payment of annuities is that they supply guaranteed income. Although determination are immoderate important differences betwixt the income generated by fixed compared to variable annuities, the bulk of annuity investments are made by radical looking to guarantee that they are provided for successful aboriginal life. However, you are apt to incur immoderate important expenses conscionable for the privilege of owning an annuity, successful summation to your superior investment.

The circumstantial fees charged by your security institution alteration with the benignant of concern you choose. Variable annuities thin to person higher fees than their fixed counterparts due to the fact that they necessitate a much active, engaged absorption style. Annuities that support your main oregon warrant your equilibrium cannot alteration transportation adjacent higher fees, often astir 2% to 3% annually.

These fees screen absorption and administrative expenses incurred passim the year. However, you apt wage an further yearly interest to offset the hazard the security institution assumes successful selling you an annuity, specified arsenic the hazard you volition unrecorded longer than expected.

Other fees whitethorn beryllium one-time up-front costs, specified arsenic a income interest to screen the committee of the idiosyncratic who sold you the annuity oregon a declaration fee. Although these expenses look tiny individually, they tin drain your status funds implicit clip due to the fact that they trim everlastingly the magnitude of wealth near successful your relationship to invest.

If you determine an annuity is nary longer the close concern for your needs and privation to retreat your archetypal investment, you incur a superior surrender charge. This complaint typically starts astatine 7% and gradually decreases implicit the archetypal 7 to 10 years of relationship ownership.

The main entreaty of an annuity is that it provides a guaranteed income for life.

Risk of Loss

If you dice earlier you usage up your 401(k) savings, your named beneficiary inherits the relationship conscionable similar immoderate different asset. If you dice earlier you person afloat benefits from your annuity, however, the security institution whitethorn extremity up keeping the remainder of your savings.

Many annuities connection the enactment of having the declaration wage implicit the people of your beingness and past transfer to your spouse if you dice first. This diagnostic mostly comes astatine an further premium, truthful your savings whitethorn beryllium astatine hazard if you bash not work the good print.

Tax Trade-Off

Many fiscal advisors urge annuities due to the fact that your concern grows tax-deferred, meaning you wage nary income taxation connected your gains until they are withdrawn. However, if your concern superior is already successful a accepted 401(k) oregon idiosyncratic status relationship (IRA), a rollover to an annuity offers nary further taxation benefits. Earnings connected 401(k) funds are already tax-deferred, arsenic are your archetypal contributions. As with an annuity, you bash not wage income taxation connected your contributions oregon involvement until you retreat those funds aft retirement.

Tight Time Limits

Another hazard to see erstwhile rolling implicit your 401(k) into an annuity: the taxation implications of the rollover itself. While the Internal Revenue Service (IRS) allows for tax-free rollovers from qualified status plans, you indispensable implicit the transaction wrong 60 days oregon hazard forfeiting 20% of your balance.

Any magnitude you bash not rotation implicit is taxable arsenic mean income, which tin substantially summation your taxation liability for the year. Arranging for a direct rollover from trustee to trustee is the mode to steer wide of this risk

The SECURE Act and Annuities successful 401(k) Plans

A imaginable alternate to rolling your 401(k) into an annuity is to spot if your employer-sponsored status program already includes an annuity option. The Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminates galore of the barriers that antecedently discouraged employers from offering annuities arsenic portion of their status program options.

For example, ERISA fiduciaries are present protected from being held liable should an annuity bearer person fiscal problems that forestall it from gathering its obligations to its 401(k) participants. Additionally, annuity plans offered successful a 401(k) are present portable. This means if the annuity program is discontinued arsenic an concern option, participants tin transportation their annuity to different employer-sponsored status program oregon IRA, thereby eliminating the request to liquidate the annuity and wage surrender charges and fees.

Advisor Insight

Adam Harding, CFP®
Adam C. Harding, CFP, advisor/owner, Harding Investments & Planning, Tempe, Ariz.

There are a multitude of risks to rolling a 401(k) into an annuity. An important 1 to see is that with an annuity you are constricted to the concern options wrong the annuity, or, successful the lawsuit of a fixed annuity, involvement rates are historically debased and your guaranteed payout is tied successful immoderate mode to existent involvement rates. You volition besides person an inflexible monthly income.

The world of status is that immoderate months are costly and others are not. If you had a play of heightened expenses (such arsenic paying for semipermanent care), you whitethorn not beryllium capable to summation your income from the annuity.

There are situations successful which annuities are bully for investors, but I person ne'er recommended that anyone rotation qualified assets into an annuity. It’s important to bash your probe and question aggregate opinions.

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