Is a 401k Rollover to an Immediate Annuity Right for You?

Written by Hersh Stern Updated Monday, March 25, 2024

A 401k plan is an employer-sponsored retirement plan offering you tax deferral benefit. Depending upon your company's plan, you may be able to defer a percentage of your salary on a pre-tax or after-tax basis, up to the specific maximum for the current tax year.

What is a 401k Rollover?

When you transfer your 401k funds into another qualified retirement account, the transaction is referred to as a rollover. In most cases, this transfer occurs when you separate from service or terminate employment. At that time you may be given several options with regard to your 401k account, including:

Cash-Out - The 401k’s current vested balance can be taken out in a single lump sum payment. This distribution will be taxed at your current federal tax rate. And, if you have not yet reached the age of 59 ½, an additional 10% early withdrawal penalty will be assessed.

Leave the Money in the Current Plan - Most 401k plans will permit you to leave your assets within the account following separation from service. If the funds remain in your former employer’s 401k plan, you will only have plan options available from your employer's portfolio.

Move the Funds into a New 401k Plan - You may be able to rollover your current 401k plan’s assets into a new employer’s qualified retirement plan. If this transaction occurs within the required time frame, you will not be subject to federal income taxes or early withdrawal penalties. Be sure to check with your new employer about options and required forms to complete this type of transaction.

Rollover into an IRA (IRA Rollover) - You can rollover your current 401k plan’s assets into an individual retirement account (IRA) established with an insurance company (or bank or brokerage firm).

Rollover into an IRA Immediate Annuity - The concept of this transaction is similar to an IRA rollover; however, the immediate annuity is the investment vehicle in which your funds are invested. An immediate annuity offers a steady, guaranteed income stream. You may be able to purchase additional riders such as inflation protection or death benefits. With an immediate annuity, the full single premium is paid upfront and converted into an income stream. The decision to place funds into an immediate annuity is irrevocable. The income stream may be established for a specified time period or for you and/or your spouse's lifetime(s). With an immediate annuity, you will receive guaranteed income payments over the duration of your lifetime. With a joint and survivor annuity, your income will continue to be paid for as long as you or your spouse are living.

Annuity 401k Rollover Advantages

Why should you select a lifetime immediate annuity to invest your 401k rollovers proceeds into? When you select a lifetime immediate annuity, you will receive income payments for the rest of your life. Your payments will not stop as long as you are living. Wasn't that your reason for saving in the 401k plan in the first place!