Can I Roll My IRA or 401(k) Into an Annuity?

The primary advantage of transferring your retirement savings into an annuity is the assurance of a consistent income stream for the rest of your life. This benefit can seem particularly attractive for those nearing retirement.

If you decide to roll over your savings, you’ll need to determine how you’ll receive payments from your annuity, how you’ll grow your investment and what’ll happen to it when you pass away.

Rolling over your retirement savings into a qualified annuity has many advantages for retirees, such as the sense of security regarding a guaranteed lifetime income. However, it’s important to also consider some of the drawbacks a roll over includes before making this move part of your retirement plan.

There are a few more points to consider before deciding whether to roll over your retirement savings into an annuity. These include the type of annuity you select and the fees that accompany it.

For example, variable annuities usually come with higher fees than fixed annuities. This is because variable annuities typically require more hands-on management. This extra effort can cost you up to 2% more a year than fixed annuity fees, according to the New York State Attorney General.

There are two ways to roll over your retirement savings to an annuity – through a direct roll over or an indirect roll over.

Direct roll overs can avoid tax implications and possible penalties. They can also meet Internal Revenue Service (IRS) requirements for required minimum distributions (RMDs). RMDs are when you’re required to begin taking out a certain percentage of your pretax retirement savings each year.

According to the IRS, an RMD kicks in when you turn 73 in 2023. However, the rule doesn’t apply to IRA annuities.

There are three strategies you could follow when rolling over your retirement funds into an annuity — delaying your payments, calculating the exact amount to roll over and laddering your annuities.

The most important tax implication to note is the roll over deadline. Once you start the roll over process, you must complete it within 60 days. Miss that deadline and you’ll owe income tax on the amount that’s not rolled over.

Specific tax implications for rolling over your retirement savings into an annuity depend on the type of retirement savings plan you have.

While investments in an annuity are tax deferred until you withdraw money from it, IRAs, 401(k)s, 403(b)s and other retirement savings plans typically offer the same or similar tax advantages. You may want to talk with a tax professional about additional tax benefits you might receive from a roll over.

Editor Malori Malone contributed to this article.