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

You can rollover funds from your individual retirement account (IRA) or 401(k) into an annuity to receive a steady income. Doing so creates an IRA annuity – a type of qualified annuity. To do this, your employer moves your 401(k) balance directly to the insurance company. Then, the insurance company will deposit your funds, tax-free, directly into the IRA annuity.

Terry Turner, writer and researcher for RetireGuide
  • Written by
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).

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    Lamia Chowdhury
    Lamia Chowdhury, editor for RetireGuide.com

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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    Brandon Renfro, RetireGuide Reviewer

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Retirement and Social Security Expert

    Brandon Renfro is a Retirement and Social Security Expert and financial planner. He focuses on helping clients create a secure financial future in retirement and co-owns Belonging Wealth Management. He is also a former finance professor and writes for several publications.

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  • Published: October 27, 2021
  • Updated: August 29, 2023
  • 8 min read time
  • This page features 7 Cited Research Articles
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APA Turner, T. (2023, August 29). Can I Roll My IRA or 401(k) Into an Annuity? RetireGuide.com. Retrieved May 19, 2024, from https://www.retireguide.com/retirement-planning/investing/accounts/ira-401k-annuity-rollover/

MLA Turner, Terry. "Can I Roll My IRA or 401(k) Into an Annuity?" RetireGuide.com, 29 Aug 2023, https://www.retireguide.com/retirement-planning/investing/accounts/ira-401k-annuity-rollover/.

Chicago Turner, Terry. "Can I Roll My IRA or 401(k) Into an Annuity?" RetireGuide.com. Last modified August 29, 2023. https://www.retireguide.com/retirement-planning/investing/accounts/ira-401k-annuity-rollover/.

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Why Roll Over Retirement Savings 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.

You can roll over several different types of retirement savings into an annuity, including:

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.

3 Steps to Choosing the Right Annuity
Choose Your Payouts
You have two annuity options – deferred annuities or immediate annuities. You typically buy a deferred annuity before you retire and use it to grow your money. You won’t pay taxes on this growth until you withdraw money from it. Immediate annuities are a better option if you’re close to retirement. You make one lump sum contribution and you have an immediate income stream for the rest of your life.
Understand Your Investment
You have three options – a fixed annuity, variable annuity or indexed annuity. A fixed annuity lets your money grow at a steady and guaranteed rate over the time period you select. A variable or indexed annuity is tied to underlying investments; their rate of growth depends on fluctuations in those indexes or other investments. Typically, indexed annuities have more risk and potential return than a fixed annuity, but less risk and potential return than a variable annuity. Generally, indexed annuities have more risk and potential return than a fixed annuity, but less risk and potential return than a variable annuity.
Consider the Death Benefit
Not all annuities have death benefits. When you die, some may turn over any remaining money to the insurance company that issued it. If you want to pass on the money left in the annuity, you will need to name a beneficiary. Keep in mind, the death benefit may be taxable. Discuss this thoroughly with the insurer when choosing an annuity.

Benefits & Risks of Rolling Your IRA or 401(k) Into an Annuity

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.

Benefits & Risks with Annuity Roll Overs
BenefitsRisks
  • Creates a guaranteed monthly income for the rest of your life that can supplement Social Security
  • Ensures you won’t outlive your money in retirement
  • You don’t pay income taxes on your annuity until you withdraw money from it
  • Fees and other charges for annuities can eat into your retirement funds
  • Many annuities can’t be passed onto your heirs — the insurance company may keep any leftover money when you pass
  • You must complete your roll over from retirement savings to an annuity within 60 days or pay a steep penalty

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.

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How To Roll Your IRA or 401(k) Into an Annuity

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

How To Roll Over Savings to an Annuity infographic

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.

Strategies for Rolling Over Retirement Funds Into an Annuity

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.

Top 3 Roll Over Strategies for Annuities
  1. Delaying Payments
Just like Social Security benefits, the longer you delay receiving payments, the bigger your payment amount will be.
  1. Calculating the Exact Amount
Don’t put the entirety of your retirement savings into one annuity. Calculate in advance how much of your income you’ll need to cover living expenses when you retire. Social Security and pensions alone likely won’t pay for 100% of your future living expenses and potential long-term care costs. Your annuity can help bridge that gap. Any remaining funds can go towards other high-reward investments, like stocks.
  1. Laddering Your Annuities
If you think interest rates will rise in the future, purchase multiple annuities with smaller amounts, instead of one large annuity. This way, you lower the risk of getting locked in a single fixed rate and have the potential for higher income if rates increase.

Tax Implications of Rolling Over Retirement Savings to an Annuity

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.

Tax Implications for Roll Overs Into Annuities
Rolling Over a 401(k) or Traditional IRAThere should be no tax impact so long as the roll over is completed in 60 days. Deposits into these savings plans are tax deferred – meaning you don’t pay income taxes until you withdraw funds. In this case, the annuity would work the same as your retirement account, so the roll over itself does not count as a withdrawal.
Rolling Over a Roth IRA or Roth 401(k)Money you place in a Roth IRA is not tax deferred – you pay income taxes on the money before depositing it in the Roth IRA. If you roll over your savings into a Roth IRA annuity, you won’t have to pay income taxes on the money you withdraw from the annuity.

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.

Annuity Rollover FAQs

Is a 401(k) roll over to an annuity tax-free?
401(k)s and annuities are both tax deferred. So as long as you follow IRS guidelines, your roll over should be tax-free until you start receiving payments.
How much money should you roll over to an annuity?
You may want to roll over enough money into your annuity to generate a lifetime income that covers your daily expenses. Factor in inflation and how much of your expenses are covered by other retirement income sources, such as Social Security or pension payments. Talk with a licensed financial advisor to help you determine how much you’ll need to produce a steady retirement income.
Can I still access my money if I roll over my IRA or 401(k) into an annuity?
You can still access your funds once you roll over your retirement funds into an annuity. But if you withdrawal funds when you’re under 59 ½, you may face a 10% penalty charge. Similarly, a surrender fee could be imposed if you’re still in the surrender period.

Editor Malori Malone contributed to this article.

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Last Modified: August 29, 2023

7 Cited Research Articles

  1. Internal Revenue Service. (2023, April 20). Retirement Topics — Required Minimum Distributions (RMDs). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  2. Kilroy, A. (2023, April 8). Should I Roll Over My 401(k) Into An Annuity? Retrieved from https://finance.yahoo.com/news/roll-over-401-k-annuity-130055783.html
  3. Rampton, J. (2023, January 30). What You Need to Know About Annuity Withdrawals. Retrieved from https://www.nasdaq.com/articles/what-you-need-to-know-about-annuity-withdrawals
  4. Internal Revenue Service. (2022, June 16). Rollovers of Retirement Plan and IRA Distributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  5. FINRA. (n.d.). Annuities. Retrieved from https://www.finra.org/investors/investing/investment-products/annuities
  6. New York Attorney General. (n.d.). Variable Annuity Investments. Retrieved from https://ag.ny.gov/resources/individuals/investing-finance/variable-annuities
  7. Office of Investor Education and Advocacy. (n.d.). Variable Annuities. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-variable-annuities.pdf