Can I Buy An Annuity With My IRA or 401k?

Yes, you can move your IRA or 401k to an annuity tax-free!

Written by Hersh Stern Updated Friday, February 27, 2015

roll over transfer ira 401k

Q. Is it possible to roll over my retirement savings, such as my 401k, IRA, or 403(b) accounts into an annuity without paying taxes?

A. You can roll over your IRA, 401(k), 403(b), or lump sum pension payment into an annuity tax-free. Annuities funded with an IRA or 401(k) rollover are "qualified" plans, enabling an insurance company to create an "IRA annuity", into which you can deposit your retirement funds directly.

Additionally, you can have your employer roll over your 401(k) funds into an annuity without withholding any taxes since no mandatory withholding requirements pertain to funds directly transferred into an annuity by an employer.

Q. If I decide to roll over my IRA, 401(k), or lump sum pension payment into an annuity, will I be hit with a distribution tax?

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A. NO. The reason you're permitted to roll over these payments into an annuity tax-free is because when you buy an annuity with IRA or 401k money the first thing the insurance company does is create an IRA holding account to receive your transferred funds.

So really buying an annuity with IRA money is the same as moving your money from its current IRA or 401k trustee to another IRA trustee. This kind of transaction is considered a "direct transfer" or a "direct rollover" which is tax-free. You will owe taxes on the monthly income you receive but not on the transfer.

Q. How can I find and purchase an IRA annuity?

A. Locating and purchasing an IRA or 401k annuity is easy if you take advantage of this website's service. Your first step is to review the annuity rates you find on our site or request a comparison annuity report that we email to you. Review the information and call us (800-872-6684) with all your questions.

When you’re ready to apply, select your preferred insurance company and we’ll send you that company's annuity application with an IRA/401k transfer authorization form. We'll help you complete all the necessary paperwork.

When the insurance company receives your application it begins the roll-over process by sending your signed transfer authorization to your current IRA/401k custodian. After a few days, they in turn send the premium amount to the insurance company. That completes the transfer and your contract is issued and sent to you. As your agent we walk you through every step of the process. This services is provided free of charge.

Q. Can I "lock in" an IRA annuity rate before the insurance company receives my distribution?

A. It is possible to obtain a "rate hold" from many insurance companies. Usually, the quoted rate is maintained for several months, typically one to three, while the cash transfer takes place. "Rate hold" periods typically begin once the insurance company is in receipt of all required forms, fully completed. (For more information about the "rate hold" practices of specific insurers, please call 800-872-6684.)

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Q. My money is currently in a 401(k) account. How do I roll it over to an annuity?

A. This depends on your employer's procedures for issuing such checks. Best to contact your Human Resources ("HR") department and ask them. They may send you a distribution request form to fill out. Once that's processed you'll receive a check made payable to the insurance company for your benefit.

This type of check is usually sent to the employee's home address. No problem there, since the check is made payable to the insurance company it's still considered a direct rollover and tax-free. Just send the check to the insurance company with a note explaining these are your funds to pay for the annuity you previously applied for. Around May 15th of the following year you'll get a Form 5498 from the insurance company confirming the amount on the check was invested in your IRA annuity.

Some employers accept insurance company paperwork and will cut a check that is mailed directly to them. That makes the rollover real easy.

Q. The lump sum pension distribution check I received from my employer is made out to me rather than to the insurance company. Will I still be able to avoid taxation on the distribution?

A. YES. To avoid taxation on your distribution, you will need to roll over the funds into a 401(k) annuity within 60 days. If your distribution is not settled into an annuity within this time period, you will owe taxes on the distribution. To expedite this process, check with your insurance company to see if it is one of the many that will accept a check made out to you but endorsed to it.

Q. I am under age 59 1/2. What tax penalties will apply to me?

A. If you are thinking of making withdrawals from your IRA or 401(k) but you are not yet age 59 1/2 you can avoid the 10% federal penalty tax by transferring your IRA or 401(k) into an immediate annuity with a "life contingent" payment option. If you receive the income periodically over your lifetime you may avoid the 10% penalty tax on the money you receive. Remember, that you must choose an annuity which will pay you over the course of your (or your and your spouse's) lifetime(s) and not an annuity which only makes payments for a limited period or term certain (for a specified number of years).

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Neal Hunt
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You can read about this exemption from the penalty tax in Publication 590 on the IRS site. Scroll to Page 56 for the section titled “Early Distributions.” Then go to the sub-section titled “Age 59-1/2 Rule,” and its sub-section called “Exceptions.” One of the exceptions is the “Annuity” rule which says: "You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½... There are two other IRS-approved distribution methods that you can use. They are generally referred to as the fixed amortization method and the fixed annuitization method." An immediate life annuity calculates its payments based on the fixed annuitization method, and, thus, satisfies the penalty exception rule.

Q. Do you provide assistance with IRA or 401k rollovers?

A. ABSOLUTELY! Since 1983, Hersh Stern, the principal of ImmediateAnnuities.com, has helped thousands of 401(k) and IRA holders roll over their lump sum pension payments to an annuity, without the need to pay taxes. This is a simple process with the right help, and we are here to answer your questions concerning rollovers and other options with expert advice. Call our customer care department toll-free at 800-872-6684 and we would be glad to help you.

IMPORTANT DISCLAIMER: This information is not intended to provide legal or tax advice. Before making any decisions related to the rollover of a qualified account into an annuity you are strongly advised to consult with proper legal or tax professionals to determine the tax consequences in your financial situation.

Comments (20)

  1. Ron:
    Jan 23, 2015 at 12:25 PM

    If I buy an annuity by moving money out of two IRA's and transferring it to an insurance company are there any tax implications? I am aware that all lifetime income payments will be taxable when we receive them.

    Am I also correct in assuming that I can purchase an annuity for my wife's lifetime with money from my IRA?

  2. Hersh Stern:
    Jan 23, 2015 at 12:42 PM

    Hi Ron,

    You are permitted to blend two IRAs into one immediate annuity in order to create an income stream that covers you alone or both you and your wife. So, yes, the transfer from your IRA to the insurance company is tax-free.

    However, you cannot buy an annuity for your wife’s lifetime with money from your IRA. If you want her to benefit from your IRA while you’re living, it must be a joint life annuity covering both of you.

    -Hersh

  3. Ed:
    Feb 09, 2015 at 11:34 AM

    Does the 10% penalty on taking your pension early drop off when the person receiving the pension turns 59 1/2 ?

  4. Hersh Stern:
    Feb 09, 2015 at 11:57 AM

    Hi Ed-

    In your situation with a 10-year period certain annuity the 10% federal penalty tax will apply on distributions received prior to 59-1/2 but not on distributions received after that age.

    You may already know that there are exceptions to the 10% penalty tax. As an example a Series of Equal Periodic Payments based on life expectancy that must continue to the later of age 59-1/2 or 5 years. Of course, a life annuity would also be another exception.

    The following paragraph is from IRS Publication 590-B for your reference:

    "Is there an additional income tax on early distributions from retirement plans and IRAs?

    "An additional 10% tax applies to early distributions (before the participant reaches age 59-1/2) from a retirement plan or IRA under Code §72(t)(1). Section 72(t)(2) lists exceptions to this tax, including distributions received in substantially equal periodic payments."

    Take care.
    Hersh

  5. Doug:
    Feb 17, 2015 at 12:57 PM

    I am 53. I have $100,000 in an IRA. Can I buy an immediate annuity for a fixed 7 year payout. I believe it has to last at least until I am 59.5 years old. The reason is that we can use that income for the next 7 years but won't need it after then.

  6. Hersh Stern:
    Feb 17, 2015 at 01:31 PM

    Hi Doug-

    There are several layers to your question. I’ll address them in order.

    1. Yes, the insurance companies we represent do sell 7 year period certain annuities. With that kind of annuity your $100,000 plus the earned interest would be completely distributed to you in equal payments over the 7 years. So by the end of the 7th year, your policy would end without no cash value. If you’d like to get quotes for this type of annuity email me and I’ll send them to you.

    2. While this limited period annuity is available, if you buy your with IRA money, there will be a 10% tax penalty to pay. First, know that the transfer from your IRA account to the insurance company would be tax-free. But because you’d be receiving withdrawals of IRA money prior to age 59-1/2 you will be subject to the 10% federal tax penalty on early IRA distributions. So, for example, if you’re in the 25% tax bracket, the income tax on this income would be taxed at 35% (i.e., 25% plus 10% penalty tax).

    3. You may have heard that income from an annuity qualifies as an exception from the pre-59-1/2 tax penalty. That is only true if you buy a lifetime annuity or take payments under the SEPP rule. Either way the monthly payment from a life annuity or SEPP withdrawal would be a much smaller dollar amount than how much you would receive by distributing $100k over a 7-year period.

    I hope I've answered your questions to your satisfaction.

    If you have any other questions about annuities, give me a call. I know they can get complicated.

    -Hersh

  7. Allen:
    Feb 19, 2015 at 01:31 PM

    Can my wife and I pool our IRAs and buy one annuity?

  8. Hersh Stern:
    Feb 19, 2015 at 01:46 PM

    Sorry, Allen, but Uncle Sam says no can do. An individual IRA can have only one owner. If you pooled your monies your “combination” IRA would belong to both of you and that is not permitted.

    However, all is not lost because you can buy a joint life annuity covering both of you using the proceeds from your IRA and remain the sole owner of that annuity. Similarly, your wife can buy an annuity with her IRA money and also cover both of you. In that way you accomplish your original goal. In fact, the monthly income fro these two annuities would be practically the same amount as you might have received from purchasing two separate joint life annuities.

    -Hersh

  9. Alma:
    Feb 25, 2015 at 12:58 PM

    I’m thinking of retiring at age 56 or 57. Will I have to pay penalties if I roll over a portion of my 401(k) into an annuity and collect the interest on a yearly basis?

  10. Hersh Stern:
    Feb 25, 2015 at 01:22 PM

    Hi Alma-

    Unfortunately, the answer is yes. Any interest withdrawals from your 401(k) will have an early distribution tax penalty of 10% unless you are at least 59-1/2 years old or if you qualify for an exception to the early withdrawal penalty. The list of exceptions is covered in IRS Publication 590 which you can locate here:

    http://www.irs.gov/publications/p590/

    Hersh

  11. Bill:
    Feb 27, 2015 at 11:07 AM

    My wife died recently. She had a $90,000 IRA which I want to buy an annuity with. Can I do that?

  12. Hersh Stern:
    Feb 27, 2015 at 12:48 PM

    Hi Bill-

    Sorry that you lost your wife.

    Regarding the annuity — what you have is called a spousal inherited IRA. You are permitted to buy an annuity with that money just make sure that the transfer takes place directly from the current IRA custodian to the insurance company. There is no 60-day rollover rule when inheriting IRA assets. So if you should receive a check from the current IRA custodian, that money will be taxed as ordinary income. You will be able to roll it over into an inherited IRA annuity. I suggest you consult a CPA for advice.

    Hersh

  13. Mike:
    Mar 10, 2015 at 11:53 AM

    If I rollover a portion of my pre-tax IRA assets into an IRA Immediate Annuity (with spouse as Joint Annuitant), am I disallowed by IRA rules from having a '20 yr Certain' feature on this annuity? In other words, must a pre-tax IRA immediate annuity be in the form of single or joint life only, with no possibility of payout period certainty?

  14. Hersh Stern:
    Mar 10, 2015 at 12:21 PM

    Hi Mike-

    You can add a period certain, installment refund, or cash refund beneficiary payment to an IRA immediate annuity. But there may be limits to the length of the beneficiary payment period time you can select so it doesn’t exceed the number of years remaining in your RMD divisor. I’ll explain with an example.

    Say a 75 year old man decides to transfer some money from his IRA to an insurance company in order to set up an immediate annuity. According to the RMD table, his distribution period divisor is 22.9 this year. In other words, he’s obligated to withdraw 1 divided by 22.9 of his IRA accounts this year as taxable income. Now if he bought a life annuity with a 40 year guarantee, the amount of income he would be receiving from this annuity this year would roughly 1 divided by 40. That’s way less than he’s obligated to withdraw according to RMD rules.

    So you can add the period certain to your annuity, but take care not to have it be longer than the distribution period for RMDs.

    -Hersh

  15. Paul:
    Mar 16, 2015 at 10:01 AM

    I’m thinking about transferring money from my IRA into an immediate annuity. My account has both traditional IRA contributions plus non-deductible IRA contributions. Can I buy one annuity with both types of money?

  16. Hersh Stern:
    Mar 16, 2015 at 10:13 AM

    Hi Paul,

    Sorry, but insurance companies will not issue an immediate annuity which is funded with commingled pre-tax and after-tax monies. The reason is that the monthly income you receive from a pre-tax IRA is considered all taxable income.

    While income received from a non-qualified annuity (one purchased with after-tax money) gets favorable tax treatment, only a small portion of each monthly payment from that annuity (the part representing new interest earned) is taxable. Your original after-tax investment amount (“cost basis”) is not subject to income tax. That would be double taxation.

    So it behooves you to buy two separate annuities each funded with monies of the same tax status, not commingled monies.

    I’d also suggest before you start this process ask your current IRA custodian how it will report the tax status of the transferred funds. Will they tell the insurance company how much of the check amount is pre-tax and how much after-tax.

    Frankly, even if the custodian company tells you they will let the insurer know how much of each type of money is being transferred, my experience informs me that the least risky way to handle this transaction to avoid reporting mistakes is to first split up your existing account before any transfer takes place. Open a new account with the present custodian and move all the after-tax money into that account. This way, you will have separated the pre- and post-tax monies at the source and there will be no way for anyone to confuse the tax status of your two annuities.

    Good luck.

    -Hersh

  17. Jessica:
    Mar 16, 2015 at 10:14 AM

    Once I roll over my traditional IRA to an annuity, can I contribute each year to my annuity plan tax deferred?

  18. Hersh Stern:
    Mar 16, 2015 at 10:32 AM

    Hi Jessica-

    The answer will depend on what you have in mind to accomplish with an annuity and whether those goals can be met with the type of annuity that is either “single premium” or “flexible premium.”

    We’ll start with a definition: A single premium annuity is always purchased with a one-time lump sum investment. A flexible premium annuity accepts additional premium payments (which you can make on occasion or on a recurring schedule).

    Let’s apply these definitions. If the reason you’re considering an annuity is to set up a monthly income for life and you’d like that income to begin immediately, then that type of annuity you have in mind is called an “immediate annuity.” An immediate annuity is always purchased with a one-time lump sum investment. Insurance companies do not accept additional premium deposits into an existing immediate annuity contract because your monthly income is determined and locked in based on the level of interest rates at the time you make your initial investment.

    Of course, you can always buy another immediate annuity by investing each year’s IRA contributions in a new contract.

    If you’re not ready to receive immediate lifetime income there are growth-type annuities to which you can add your annual IRA contributions. These are called “flexible premium” annuities. Examples of these are deferred interest (MYGA) or indexed annuities. You can read more about them by clicking these links:

    Deferred interest annuities (MYGA): https://www.immediateannuities.com/deferred-annuities/

    Indexed annuities: https://www.immediateannuities.com/fixed-index-annuities/

    One final point. It’s important to know that the majority of flexible premium annuities impose early surrender fees that restrict your access to your cash value. These surrender fees tend to be enforced on what’s called a “rolling basis.” This means, each year’s new investment in a flexible premium annuity will be subject to the full surrender fee schedule. So even in your 10th contract year when surrender fees may have disappeared from your original, first year’s deposit, there will likely be surrender fees on withdrawals from the 2nd, 3rd, etc., year’s deposits.

    Hersh

  19. Karri:
    Mar 27, 2015 at 09:39 AM

    I borrowed money against my 401k to purchase a house. My husband has an annuity that is just sitting there. Can he roll over his annuity into my 401k to pay back the loan? Thank you.

  20. Hersh Stern:
    Mar 27, 2015 at 12:39 PM

    Hi Kerri-

    I think what you are asking is whether he can transfer money to your 401k tax-free.

    First, let’s assume your husband’s annuity is funded with IRA or 401k money. So he owns what I call an IRA annuity. Now, if his annuity has a liquidity or withdrawal feature he could request a transfer of its cash value into an IRA or 401k account that he owns.

    However, since couples are not permitted to commingle IRA or 401k accounts, these need to be kept under separate individual ownership, I believe your husband cannot roll over money from an IRA annuity at he owns into a 401k account that you own, without triggering a taxable event.

    Hersh

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