While saving for retirement, you may have heard of rolling over your IRA or 401(K) into another account or financial product. For example, you can roll your retirement savings into an annuity, an insurance product, a brokerage account, or another retirement plan, amongst others. But should you roll over your retirement savings, and if so, to what kind of plan or product?
Naturally, each option has its own advantages and disadvantages, along with its own tax implications and financial objectives. In this article, we’ll explore one of these choices – rolling an IRA or 401(K) over into an annuity. In future articles, we’ll discover your other options, but for now, we’ll stick with the annuity option.
What exactly is an IRA to Annuity Rollover?
Your retirement savings are safely tucked into your IRA or 401(K). And for reasons we’ll get into in a minute, you decide you’d rather have all or a portion of your savings in an annuity. You find an annuity provider, contact your plan administrator, and purchase an annuity with your retirement savings.
You have two options when purchasing the annuity. You can:
- Execute a direct rollover to purchase a Qualified Annuity.
- Cash out your savings, pay any taxes it incurs, and purchase a Non-Qualified Annuity.
- Cash out your savings and buy a Qualified Annuity inside another IRA within 60 days to avoid a tax burden.
When to Roll Over Your Savings into an Annuity
Purchasing the annuity with your retirement savings is the easy part. Why would you want to buy an annuity with your retirement savings, though? And when?
Conventional retirement planning wisdom states that one should slowly move away from more volatile investments to more stable and secure investments as you near retirement age. However, many workplace retirement plans and personal IRAs are composed of naturally volatile stocks and bonds.
An annuity helps to alleviate the volatility within your retirement savings by offering guaranteed income. You’re exchanging the potential growth volatility offers for steadiness, stability, and sustainability.
The simple answer is that it may be an excellent time to purchase an annuity with your retirement savings when you feel you can no longer risk keeping your savings (or at least much or all of your savings) in inherently risky stocks and bonds.
There are, of course, nuances.
Besides simply wanting to move your hard-earned savings away from volatile investment assets, you may want to consider an annuity in the following circumstances:
Reduce Longevity Risk
One of the greatest fears retirees face is outliving their money. People are living longer and longer, making it increasingly difficult to determine a withdrawal strategy with a high degree of accuracy. If you spend too much of your savings each year, you increase the chances of longevity risk. If you spend too little and have plenty of money left (barring legacy concerns), you could have experienced an improved lifestyle.
An annuity can help alleviate the risk of running out of money by providing a guaranteed income stream at the end of your life when you need it most. A diversified portfolio is a healthy portfolio, and an annuity purchased using tax-advantaged retirement savings may be the tool necessary to round it out.
Craft Your Financial Legacy
Disadvantages of an IRA to Annuity Rollover
While annuities offer stability and predictability, there are some disadvantages to consider. Remember that you don’t have to move all your retirement savings into an annuity. You may roll over only the amount necessary to optimize your tax situation, for example, or the amount you feel you will need later in life. A financial professional can help you determine the proper amount, if any, to roll over to enhance your financial plan.
Limited Liquidity
Accessing your funds can become more challenging once you roll your IRA or 401(K) savings into an annuity. Annuities often come with surrender charges and withdrawal limitations, especially during the initial years, so you want to be sure that you won’t need the fund until the agreed-upon date when your payments will begin.
Inflation Risk
With an annuity, you exchange potentially higher growth for possibly lower growth, though with a guaranteed income stream. As a result of this exchange, an annuity may not keep pace during high inflation, eroding your purchasing power. However, some modern annuities have built-in inflation hedges while still providing a lifetime income stream.
Costs and Fees
Final Thoughts
Is an annuity right for your specific and unique financial needs? To clarify even further, is an annuity purchased utilizing an IRA or 401(K) rollover the right fit for your financial plan? Like most financial decisions, it heavily depends. It depends on your risk tolerance, life expectancy, tax situation, savings levels, and legacy wishes, amongst others.
However, some basic conclusions may apply to many American investors. Purchasing an annuity while still young and in a growth mindset probably doesn’t make sense for investors looking to enlarge their savings quickly. However, those reaching retirement age or beyond with less of a risk appetite may find the stability an annuity brings appealing.
If you’d like to review your financial plan and determine if an IRA or 401(K) to Annuity Rollover is right for you, click the button below – we’re here to help and guide you through the decision-making process.
