5 Questions to Ask when Rolling Over to an IRA Annuity

Written by Hersh Stern Updated Friday, December 14, 2018

When your employment ends, you have the option of moving funds from your company-sponsored retirement account, including a 401k, 457, or 403b plan, directly into an IRA annuity account. This is called an IRA rollover.

Here are 5 questions that you should ask if you are considering an IRA rollover:

1. What is the Difference between a Distribution and a Rollover?

Simply put, if your employer's check is made payable to you, it's considered a distribution (but you have 60 days to roll it over into an IRA annuity). What’s more, if you are not yet 59½, your distribution will be subject to an additional 10% early withdrawal penalty.

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If your employer's check is made payable directly to the new IRA custodian, it's called a rollover. Taxes will not be assessed because you never received the cash. The retirement money will remain tax deferred, and you won't pay taxes until you begin receiving income payments from your annuity.

2. How Do I Start an IRA Rollover?

First, decide which annuity you’d like to buy. If you are unsure of how to decide, let us know and we can help you sort through the various types of plans and options. Once you you’ve decided, we'll send you an application and an IRA Rollover (Transfer Authorization) form.

Next, call your former employer and tell them you've decided to roll over your retirement money to an insurance company IRA annuity. At that point, they will either send you paperwork to complete or ask to have the insurance company contact them directly (using the carrier's Transfer Authorization form).

If you have any questions on how to fill out the employer’s paperwork, call us. We can set up a conference call with you and your employer to ensure the paperwork is completed properly so your money goes directly from the employer to the insurance company.

3. What Types of Accounts Can Be Combined?

Can several different retirement accounts be combined into one annuity? It depends on the types of pre-tax accounts you have.

IRA, 401(k), 403(b), Keogh, Pension Plan, SIMPLE IRA, and SEP IRA:

Because of the similarities between these accounts, they can be combined. Simply put, the money was tax deferred when you put it in, so when it is withdrawn it will be considered taxable income.

In fact, you can combine several tax-deferred IRA or 401k accounts into one annuity. They can be rolled over at the same time to fund one IRA annuity account.

If your pension plan offers you the ability to take a lump sum distribution, that lump sum can usually be rolled over right into your IRA annuity, too. Tell your employer to make its check payable to the insurance company, not you.

What other types of accounts can be combined?

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Comments (8)

  1. Jack:
    Mar 31, 2015 at 09:45 AM

    I have both Traditional IRA and Roth IRA money that I’d like to invest in an annuity. Can I combine these?

  2. Hersh Stern:
    Mar 31, 2015 at 09:49 AM

    Hi Jack-

    First, it's important to know that for the most part, Traditional IRAs and Roth IRAs are priced alike by insurance companies. The rates are the same.

    However, if you invest in an income annuity (either immediate annuity or deferred income annuity) because the income you receive from a Roth IRA is not subject to income tax, while the income from a Traditional IRA is taxable, you’ll need to keep your IRAs in two separate policies. One policy for the Traditional IRA money and the other for the Roth IRA money.

    Splitting your premium into two contracts will have a slightly negative effect on the overall monthly income you would receive. In other words, the combined income from two smaller policies is likely to be about 1/2 of 1% or so, less per month, than if all your money was invested in one annuity.

    That’s the cost to preserving the favorable tax status of your Roth IRA :)

    -Hersh

  3. Juan:
    May 29, 2015 at 12:10 PM

    I'm under 59 1/2, can I roll over from my 401k to an annuity while still employed with the company that manages my 401K? Or is it only allowed at retirement or end of employment service?

  4. Hersh Stern:
    May 29, 2015 at 12:12 PM

    Hi Juan,

    You will need to check with your 401k administrator as to whether or not you can roll-over your 401k while you are still employed by the managing company. There are no laws regarding this, it depends on how your 401k was set up, and your plan administrator is the only person who can answer this question.

    If your plan permits you to roll-over all or some of your 401k account into an annuity, then even though you're not yet age 59-1/2, the roll-over would be tax free. That's because the insurance company will issue your annuity as an IRA annuity.

    If your goal is to withdrawal money from your 401k prior to 59-1/2 through the vehicle of an annuity, you can avoid the 10% penalty depending on which type of annuity is providing the income.

    If you are taking discretionary withdrawals from a fixed index or a multi-year deferred annuity then you will still have to pay the penalty. If, however, you purchase an immediate or a deferred income annuity with a lifetime payment option, then the 10% penalty would not apply. If you purchase an immediate or a deferred income annuity with a period certain payment option, then the 10% penalty would apply.

    Finally, if all of this sounds confusing, call me at 800-872-6684. I'd be happy to answer your questions.

    -Hersh

  5. Michael:
    Jul 24, 2015 at 02:51 PM

    I currently have some money in IRA's, which I am considering rolling into an immediate annuity to supplement my income when I start collecting social security at the end of the year. I assume there is a method to doing so?

  6. Hersh Stern:
    Jul 24, 2015 at 02:55 PM

    Hi Michael-

    Yes there is method to this madness. LOL. As you get closer to your target purchase date I suggest you can come back to the web site and request fresh quotes so you have a feel for where rates are at that time. You can also call our sales team and speak with a licensed rep who will be happy to review your retirement income plans with you.

    When you’re ready to make the purchase you choose one or several insurance companies to apply to (e.g., if you’d like to split the risk across two or more carriers you select more than one company to apply to). We’ll pre-fill the company’s application(s) for you and overnight it along with IRA transfer authorization forms so the money moves from the present custodian directly to the carrier. We track the transfer and underwriting process and keep you informed about it's progress. If there are no delays or issues you should have your policy in 3-4 weeks with your first monthly payment to follow in 4 weeks.

    Hersh

  7. Lynda:
    Aug 03, 2015 at 04:03 PM

    My IRA has a cost basis. How is that accounted for in an annuity?

  8. Hersh Stern:
    Aug 03, 2015 at 04:06 PM

    Hi Lynda-

    The insurance company will separate your IRA money into two contracts each with a different tax status. The pre-tax IRA money will go towards the purchase of a so-called “qualified” annuity. The after-tax portion will fund your “non-qualified” annuity.

    All distributions you receive from the pre-tax qualified annuity will be subject to income tax. Payments you receive from the non-qualified annuity will be mostly tax-free except for a small portion which represents new interest earned and will be subject to ordinary income tax.

    Hersh