Can you roll a 401(k) into an annuity? How it works, and when it makes sense

Yes, and with no tax due. The better question is whether it's right for your money, and for how much of it.

Yes. You can roll an old 401(k) directly into an annuity issued by an insurance company. The annuity is set up as an IRA, so the move isn't taxed, and the money keeps growing tax-deferred until you take it out.

What kinds of annuities can hold rollover money

• MYGA (multi-year guaranteed annuity): a fixed rate, guaranteed for a set number of years, usually 3 to 10. It works much like a CD from an insurance company.
• Fixed indexed annuity (FIA): your interest is linked to a market index, such as the S&P 500, up to a limit, and you never get a negative credit when the index falls. Many offer an optional lifetime income rider. Here's how they work.
• Variable annuities are a different product: they're securities, invested in the market, and can lose value. This site doesn't cover them.

"But an IRA is already tax-deferred." True.

This is the most common criticism, and it's correct: putting an annuity inside an IRA adds no extra tax benefit. If the only reason someone gives you for an annuity rollover is tax deferral, that's a red flag.

The real reasons people do it are different:

• Protection. A fixed or fixed indexed annuity doesn't lose value when the market falls. That matters most in the 5 to 10 years before retirement, when a big drop is hardest to recover from.
• A paycheck for life. An income rider or annuitization can turn savings into a monthly income that continues as long as you live, even if the account itself runs to zero.
• Simplicity. One account instead of several old 401(k)s, with growth and income terms written into a contract.

When it usually makes sense

• You're roughly within 15 years of when you'll want income.
• A 30% market drop right before retirement would change your plans.
• You want part of your income guaranteed, on top of Social Security.
• You have other money for emergencies and won't need this beyond the yearly free withdrawal, usually 10%.

When it usually doesn't

• You may need the money within the surrender period, which often lasts 5 to 10 years.
• You want full stock-market growth and can live through the drops.
• It would be most of your savings, leaving you too little cash on hand.

Most people who use an annuity put part of their savings in one, not all of it.

Required minimum distributions still apply

An IRA annuity follows the same withdrawal rules as any IRA. Required minimum distributions start at 73, or at 75 if you were born in 1960 or later. Many contracts let you take your required amount without a surrender charge; confirm that in the contract.

Questions to ask before you sign anything

1. What is the surrender schedule, year by year?
2. How much can I take out each year with no charge?
3. What are the current caps or participation rates, and what's the minimum they can drop to?
4. Is there a rider fee, and what exactly does it buy me?
5. What is the insurer's A.M. Best rating?
6. What happens to the money if I die?
7. How is the agent paid?

On that last question: if you buy an annuity through me, the insurance company pays my commission. You don't pay a fee, and your whole deposit goes into your contract. You should hear that from any agent before you sign.