How Does a 401k Rollover to Annuity Work | Annuity Watch USA

How Does a 401k Rollover to an Annuity Work

By Cathy DeWitt Dunn

401k rollover to annuity blog illustrationRolling over your retirement savings into an annuity can be a great way to support yourself and fund your retirement. Learn more about deferred annuities, annuity advantages, and whether or not a 401(k) rollover is the right decision for you.

Annuity Investment Options

In October of 2014, the United States Treasury Department issued guidelines that are meant to encourage employers to enable employees to contribute part of their 401(k)s to a deferred annuity. These guidelines were put in place in an effort to help future retirees and current retirees protect their savings. By placing 401(k) contributions into a deferred annuity, retirees are providing a type of security to their hard-earned money. This money is available to retirees long after retirement. Without this additional protection, a retiree may outlive his or her money.

Traditional methods of investing provide great options for saving up until retirement, but that’s where the story ends. After retirement, without additional security of funds, this money can quickly dwindle away, leaving the retiree with nothing at all to pay his or her bills. With a deferred annuity, you’re provided with an income stream that you can count on for the rest of your life. Any money left after your death can pass onto a beneficiary.

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The Pension Protection Act of 2006

The PENSION PROTECTION ACT OF 2006 was passed in an effort to help future retirees better plan for their futures by encouraging them to enroll in 401(k) plans. Employers who participated would automatically enroll employees in a 401(k) plan and, if the employee would rather not enroll, they can simply opt out. Since 2006, 401(k) participation has greatly increased and these new guidelines issued by the U.S. Treasury may encourage further participation.

Advantages of a 401k Rollover to an Annuity

Two of the most obvious advantages of a 401(k) rollover to an annuity is that it offers principal protection and a guaranteed income stream for life, but there is another advantage as well. Retirees who opt to purchase an income benefit rider with their annuity will lock into a guaranteed rate that they’ll reap the rewards from later. This advantage is considered to be a form of market protection. Additionally, retirees need only invest 25% of their 401(k) or $125,000, whichever amount is the lesser of the two. The money invested accrues quickly and the “return of premium” death benefit is highly-appealing to retirees, which allows moneys to go to the heirs of the retirees.

Is a 401k Rollover to an Annuity the Right Decision?

Some things to consider when debating whether or not you should invest your 401(k) rollover to an annuity includes the annuity type itself and the age that you plan on retiring. An annuity is more ideal for retirees who are ready to retire and want to protect the money saved within their 401(k)s. Workers who have many more years to go before retiring may wish to wait a while before purchasing an annuity. The terms, costs, and fees should also be taken into consideration. Before signing on the dotted lines of any annuity agreement involving your 401(k) make sure you’ve read the fine print and know what you’re truly getting into.

You may wish to shop around before settling on one particular annuity plan to ensure that you’ve made the wisest choice for your personal budget. When considering the cost of an annuity plan, you should also know that the price of an annuity will vary depending upon your age.


One final perk to consider regarding annuities with 401(k)s is that the U.S. Treasury’s guidelines allow retirees to mix their annuities with other types of savings vehicles. If you’re considering a 401(k) rollover to an annuity and want to learn more, consider speaking with the human resources advisor of your company or with your financial or retirement income planner.

Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

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Disclosure: Guarantees and benefits are subject to the claims paying ability of the issuing insurance company.


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