Should You Roll Over Your 401(k) Into an Annuity? Here’s When It Makes Sense

jacoblund / Getty Images/iStockphoto

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Preparing for retirement involves a lot of decision-making, and some of it isn’t as glamorous as choosing where to take your first long vacation. One of the biggest decisions you’ll face is what to do with the decades’ worth of savings you’ve accumulated in your 401(k).

For some retirees, staying the course — keeping their money invested and managing withdrawals — is the wisest approach. However, others may wonder about the prospect of rolling those funds into an annuity.

These retirees are often tempted by the promise of guaranteed income for life — after all, who doesn’t want a safe, simple way to ensure long-term financial security? But like any decision, this one comes with potential trade-offs, such as high fees or limited flexibility. However, rolling your 401(k) into an annuity may make sense in specific circumstances.

To help you understand if this decision could work for you, GOBankingRates spoke with two experts.

Rolling Over May Make the Most Sense When You’re Close to Retirement

Ron Tallou, wealth management advisor at RJP Estate Planning likens the annuity to a Swiss Army knife among retirement products. His reasoning lies in the versatility of different types of annuities and how they can be structured to solve a range of retirement concerns.

“There are annuities designed for growth purposes; some are designed with income as the main output, others for safety reasons, and others for death benefit or [long-term care] concerns,” he said.

His advice is to consider an annuity rollover when you’re closer to retirement or in the early stages of it. Tallou notes that most 401(k) plans don’t allow for in-service distributions while you’re still working and under age 59½. Simply put, you’ll have to wait until then to move your money from a 401(k) into an annuity.

“Prior to that, I would say not to make the change because you are likely limiting your returns. In 401(k)s, you can typically see higher returns at lower plan costs,” he said.

You Need an Annuity That Matches Your Goals

Tallou says the biggest mistake retirees make when rolling money into an annuity is choosing one that doesn’t align with their retirement goals. There are different kinds of annuities, and some are better suited to certain financial needs than others.

• Fixed annuities: “Fixed annuities are ideal for investors who want guaranteed returns,” he said. “The interest rate is predetermined for a set period of time, so there’s no guessing — you’ll know what you will earn ahead of time.” 
• Fixed indexed annuities: These are better suited for people who want to protect their principal while seeking potentially higher returns than fixed annuities typically offer. 
• Variable annuities: “Variable annuities are ideal for investors focused on accumulation. They offer a wide range of sub-accounts that can be conservative or very aggressive,” Tallou said. “Variable annuities can look very similar to 401(k)s in terms of behavior.” They can also provide a guaranteed income stream or some downside protection, but not full protection like a fixed indexed annuity, he noted. 
• Income annuities: These are best for investors primarily concerned about outliving their savings. “Income annuities allow you to purchase your own pension plan and can set up income for the rest of your life — and even your spouse’s,” he said.

Tallou also advises retirees to consider annuities that offer riders for an additional cost. These riders can enhance plan benefits in ways that support long-term care or family support goals.

“Sometimes you can add a death benefit that would pay your loved ones a greater amount than your actual balance,” he said. “These riders can also help retirees concerned with nursing home costs.”

Be Aware of the Fees Involved

Chad D. Cummings, Esq., CPA and CEO of Cummings & Cummings Law, always warns clients to understand the fees associated with annuities.

“Fees can be devastating. A $250,000 variable annuity with a 2.5% combined fee structure consumes $6,250 annually, regardless of market performance,” he said. “Over 20 years, that’s $125,000 in cumulative drag. Riders for guaranteed income or long-term care benefits often add another 0.5% to 1% per year.”

As you work with your financial advisor to determine whether rolling your 401(k) into an annuity is right for you, be sure to ask detailed questions about fees and potential costs.

Make Sure Withdrawal Rules Match Your Time Horizon

Tallou also encourages retirees to ask about the length of the annuity contracts. Since annuities are insurance contracts with carriers, investors should know how long their money must stay invested — and whether that aligns with their retirement time horizon. 

Additionally, he says investors need to understand withdrawal rules.

“Annuities typically restrict your withdrawals for a certain number of years, and investors need to know how much they can withdraw — and whether that fits their needs,” he said. “They should always ask about the costs and fees involved. Ask how much the annuity will cost compared to keeping the money in the 401(k) plan.”

Bottom Line

Deciding to roll over your 401(k) into an annuity shouldn’t be done lightly. It requires a clear understanding of your retirement goals and how the annuity’s structure and fees align with them. For some, annuities can offer a more stable income stream in retirement. For others, the fees and restrictions may outweigh the benefits. 

As always, working with a trusted financial professional can help ensure you make the right decision for your long-term financial security.

This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.

Share This Article: