Can I Roll Over My 401(k) to a Tax-Deferred Annuity?
Employer-sponsored 401(k) plans allow you to withdraw and manage funds on your own after reaching retirement age. Although this may seem attractive, unexpected expenses or poor financial planning can put you at risk for depleting your retirement nest egg too soon. You can help prevent this by purchasing income insurance in the form of a tax-deferred annuity. Internal Revenue Service rules allow you to buy such an annuity by rolling over your 401(k).
Under IRS regulations, a 401(k) rollover occurs when you transfer all or some of your account to another qualified retirement plan such as a tax-deferred IRA annuity. You can do this by direct transfer between financial institutions or by receiving a qualifying distribution in cash and transferring the money yourself within 60 days. A qualifying distribution means you are receiving money because you found new employment and are no longer participating in the plan or because you are taking a one-time distribution at retirement.
Roll over your entire 401(k) within the appropriate time frame to ensure you don't incur a tax liability. While you still need to report the rollover on IRS Form 1099-R, your money remains tax-deferred. However, if you exceed the 60-day time frame, your money is subject to a 20 percent withholding charge, and if you decide to roll over only a portion, you must report the amount you don't invest as income on your annual tax return. In addition, the IRS will assess a 10 percent penalty on the amount you don't roll over if the distribution is made before you reach age 59 1/2.
Tax-deferred annuities come with different payout options. An immediate single-life annuity guarantees you monthly income for life. A joint-and-survivor annuity offers you a choice of a monthly income for the lifetime of you and your spouse or for a specific time, such as 10 to 20 years, which may benefit your heirs. With both, the amount of money you receive each month depends on the principal in the account, interest rates and your estimated life expectancy. Another option is to choose a deferred annuity. Here, your money grows according to market performance. While there is no built-in income guarantee, you can buy a rider that includes a "worst-case scenario" clause and ensures a minimum rate of return.
To help plan for your retirement, list all of your sources of retirement income in addition to your 401(k), including assets such as IRAs, stock market investments and real estate. Set a conservative retirement budget and keep some flexibility by managing all but your 401(k) yourself. You can preserve the tax advantages of your 401(k) by rolling it into an annuity and guaranteeing income for life.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.