Annuity rollover rules: Options & considerations (2024)

Many people build their retirement savings through employer-sponsored 401(k)s or individual retirement accounts (IRAs). Those savings can help give you confidence about your financial future.

But if you're concerned you might outlive your IRA or 401(k) savings, you may want to consider rolling your retirement plan assets into an annuity. Annuities are designed to help accumulate retirement money and offer options to start a retirement income that can last as long as you live. As you explore the option of rolling your retirement plan assets into an annuity, it's helpful first to understand the rules.

You can roll your savings from various retirement accounts into an annuity. Here are the most common types of eligible accounts:

Funds from a traditional IRA can be moved from another product into an annuity. Your money stays tax-deferred because the plan (traditional IRA) stays the same. You are just moving to a different type of retirement product, the annuity.

You can also move funds from a Roth IRA from another product into a Roth IRA annuity. Your retirement money can continue to grow tax-deferred and withdrawals will be tax-free as long as you meet the Roth IRA rules.

If you've left an employer where you had a 401(k), 403(b) or 457(b) plan, you can roll those funds into a traditional IRA annuity.

Following rollover rules is important, especially because of the potential tax ramifications if you miss something. There are three options: a direct rollover, an indirect rollover from an employer plan, or a transfer from one IRA to another. Each has potential advantages, complexities and tax implications.

With a direct rollover, your employer sends your retirement funds directly to an annuity IRA. This is typically the most straightforward approach. Generally, your employer and financial institution will do most of the work for you; you'll just need to sign authorization paperwork.

For example, if you choose a direct rollover from a 401(k) to an annuity IRA, you typically won't see tax ramifications because it is handled directly.

A less common approach is for you to take a distribution from your employer plan. Then you have 60 days to roll it over into an IRA. You could roll this money into an IRA annuity. An indirect rollover from an employer plan is more complicated, and it is important that all paperwork be completed correctly.

If you are changing products but the plan itself is staying the same, this is typically done by a transfer. For example, if you have a traditional IRA in one product and you want to move the money to a traditional IRA in an annuity, the two financial institutions will move the money through a transfer. A transfer has no tax consequences or reporting requirements. You will just need to complete paperwork with the financial institutions.

Every financial product has its pros and cons. Part of learning more about your retirement savings and income options is understanding which works best for your needs.

Some advantages of rolling a retirement money into an annuity include:

• Guaranteed income. The biggest benefit of an annuity is it can provide guaranteed income for life, giving you confidence you'll have a steady income and won't run out of money in retirement.

• Payout flexibility. Depending on the type of annuity and contract you choose, you may be able to build a payment schedule around your needs.

• Death benefits. Annuities often provide death benefits which are insurance features that you may be interested in.

Some disadvantages of moving retirement money into an annuity include:

• Fees and expenses. Annuities may have a variety of fees, ranging from management to administrative, as well as potential charges for riders. Compare any fees and expenses with the insurance features the annuity may provide.

• Liquidity issues. You may have to pay surrender charges if you withdraw funds earlier than the annuity specifies in its contract.

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Depending on your current savings and retirement plans, an annuity may fit your needs. Consulting a financial advisor is a great way to determine if it's right for you. Here are three things to consider:

Annuities may provide guaranteed income for the rest of your life. If you're worried you may not have enough savings or have fears about Social Security, an annuity may help alleviate some of those concerns. For example, you may want annuity income to cover your fixed expenses in retirement.

Annuity rollovers don't have to be all or nothing. You can keep a portion of your IRA, 401(k) or other retirement savings in their current products while moving some money to an annuity. This can offer the insurance features provided by annuities for some of your retirement savings.

Annuities aren't a fit for everyone. It will depend on your retirement goals and financial situation. A financial advisor can help you strike the right balance with the tools that work for you.

Before rolling over funds from any retirement account into an annuity, remember a few considerations:

• Understand the fees associated with the annuity. They may vary depending on the type and contract.
• Realize the tax implications and rollover rules. Rolling over funds in a way that's not allowed may result in penalties.
• Do your research. There are a variety of annuities, each with different benefits, disadvantages and risks.
  

People choose to rollover retirement savings into an annuity for various reasons. While annuities aren't the best fit for everyone, they can offer real advantages for some individuals and situations.

Getting guidance on annuities, rollover rules and how they fit into your financial plan can help. A local Thrivent financial advisor can take you through the complexities and financial implications to guide you to a decision that aligns with your goals.