401k Annuity: What Are The Risks Of Rolling 401(k) Into An Annuity?

Published on: September 30, 2023

Last Updated on: October 2, 2023

401k Annuity

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Having a 401k retirement account lets you leave your money at work in mutual funds and invest funds, so you earn higher returns after your retirement. There are other retirement options as well, which let you make money. However, one of the lesser-known ways that some people approach is that they cash out their 401k and choose an annuity (401k Annuity). This leads to income exchange, but the returns are modest.

In this article, you will learn about what happens when you roll over your 401k retirement money to your annuity. You will also learn what are the ways through which you can make money through this method. Finally, we will also explain to you what are the major risks that you might face once you roll your 401k money to Annuity. Hence, to understand more about 401k Annuity, read on through to the end of the article.

401k Annuity: What Is Rolling 401k Into Annuity?

According to Yahoo Finance, “A 401(k) rollover is when you transfer the money from a 401(k) to another retirement savings account. Doing so allows you to simplify your retirement savings plan in different situations. For example, if you find a new job or retire, you can bring your old 401(k) with you and deposit your money into your new employer’s plan.

If your new job allows 401k, you can transfer your 401k account. However, in some other cases, you might leave a job for another one that does not offer a 401k retirement account. In such a situation, you will need to roll over your funds into an individual retirement account (IRA) or an annuity. Apart from that, if you find a retirement savings vehicle that offers you better returns than your 401k account, you should consider a rollover.

According to the Forbes Advisor, “an annuity is a type of insurance contract that generates steady income in retirement. You fund an annuity with either a lump-sum payment or payments over time, and then the company makes regular payments for a set period of time. In fact, you can own annuity contracts in your 401(k) account, like you would a mutual fund.

If you want to rollover your 401k into an Annuity, you will need to discuss the idea with a financial advisor. The advisor will help you find the best annuity for your type of situation. Apart from that, they will also ensure that your rollover is secure and everything is correctly done. Always choose a direct transfer and not the indirect transfer of 401k since the former is easier to perform.

Can You Make Money With 401k Annuity?

Of course, you can. However, it is a risky option to choose for your case (which we will discuss in the next section). Furthermore, an annuity also offers you a steady income regardless of the changes that happen due to economic ups and downs, as well as the performance of the stock market.

However, the annuity drains the fund. For example, if you have an annuity of $1 million, you will get up to $70,000 in annual income until you pass away. However, with 401k, or an IRA, you or your beneficiaries will get in the money as long as the account produces investment income. Also, your withdrawals do not drain the fund.

What Risks Do You Have If You Roll Your 401k Into Annuity?

According to Investopedia, “In addition to the sometimes hefty fees incurred by annuitants, you risk losing part of your investment if you die prematurely, as you may not be able to pass the remainder of the annuity on to your beneficiaries. Many insurance companies tout the tax benefits of annuities. However, a traditional 401(k) is already tax-sheltered, and a delayed rollover could cost you in taxes.

The following are the major risks you will have to incur if you roll over your 401k to an Annuity:

1. Pay Extra Fees

One of the best things about annuities is that they provide you with a guaranteed income. However, with an annuity, you will need to incur substantial expenses just because you want a guaranteed income. There are also other capital expenses. Based on what investment you choose, you will have to pay specific fees to the insurance company.

2. Higher risks Of Loss

If you have a 401k account, and you die before you use up your 401k savings, your beneficiaries will still be able to get that money in their account. However, if you have an annuity, once you die, your beneficiaries will not get the payment from the annuity. Here, the insurance company ends up keeping the remainder of your savings.

3. Tax Trade-Off

Until you do not withdraw your money from the account, you will not have to pay income tax on them. That is why many financial advisors recommend annuity. However, if your money is already in a traditional 401k, you will not get additional tax benefits. Your 401k funds are already tax-deferred.

4. Lower Time Limits

There are tax implications of the rollover to the annuity. The IRS allows the rollovers to happen tax-free from qualified retirement plans. However, you will still need to complete the transaction within sixty days. Otherwise, you will lose 20% of your balance in the account.

Wrapping Up

Hope this article was helpful for you in getting a better understanding of how 401k Annuity works once you roll over your 401k money to your annuity account. Although there shall be guaranteed income once you choose this method, it will still be risky for you, so you will first need to consider it. One of the risks is that it has many fees and charges that reduce your funds.

Apart from that, if you somehow die prematurely, you will risk losing a part of your investment, as your beneficiaries will not get the remainder of the annuity. Do you have anything more to add regarding how the 401k Annuity works? Share your thoughts and ideas with us in the comments section below.

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Soumava Goswami

A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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