Can You Roll Over a 401(k) Into an Immediate Income Annuity?

You've packed up your desk, shaken hands all around and left the office for the last time as you begin the new phase of your life: retirement. Figuring out how to make ends meet for the rest of your life isn't easy. One way that allows you to continue receiving a regular "paycheck" is rolling over your 401(k), or any other type of tax-deferred retirement savings plan, into an immediate income annuity.

Income Stream

Annuities invest your savings and provide regular payments. They essentially allow you to create your own pension, with a guaranteed monthly or yearly income stream for the rest of your life. This helps with budgeting and stretching the money throughout your retirement years. An immediate income annuity begins paying right away, like the name implies. You buy it with one payment and can typically receive income payments in a month or two. This differs from other annuities where you continue to invest more money or rollover funds but don't receive regular benefits anytime soon.

Investment Choices

Many companies offer annuities that are invested in the stock market or tied to indexes to appeal to those who want to continue growing their assets after retirement. Some offer a fixed annual percentage of earnings, much like a savings account. Others are subject completely to the stock market and its volatility. Still others have minimum and maximum limits on the range your investment can earn. This lets investors protect their savings from losses in exchange for limiting what percent can be earned in the market in a given year. For example, an annuity may allow investors to earn from zero to 13 percent, no higher and no lower. Some products will lock in your initial investment and ensure account holders will not suffer market losses. If the account value is $200,000 initially and drops to $180,000, your monthly payments will not change. However, if the market goes up, some annuities allow for your monthly income to rise, too.

Taxes

Funds from a 401(k) can be rolled into an annuity without an immediate tax hit. Let the administrator for your old company's 401(k) know you are rolling the funds into a qualified annuity -- a tax-deferred fund -- and you want the funds sent to the annuity provider. Don't have your retirement fund assets sent directly to you in your name or it will be subject to 20 percent withholding, and you may owe taxes on it at the end of the year. When you begin receiving regular annuity payments, they will be treated as taxable income each year. This is how you ultimately pay the taxes on your tax-deferred 401(k) or retirement plan.

Considerations

Annuities are sold by banks, insurance companies and investment firms. Compare their features, costs, surrender periods, penalties if you need to pull the money and potential riders to deal with inflation or health issues. An immediate income annuity helps you set up a steady budget for routine expenses each month. However, it is a good idea to keep some of your 401(k) or other retirement assets in a separate account for emergencies, travel or other things outside your regular budget. Think of an immediate income annuity as a paycheck and the other funds as your play check.

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About the Author

Dyanne Weiss has more than 20 years experience in human resources and corporate communications. Her communications strategies' have aided employee engagement and understanding of health care benefits, retirement planning, performance planning and compensation. Weiss has also worked in several industries: energy, insurance, banking, financial planning and health care. She has an MBA in management and organizational behavior.

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