Overview

Many investors have contributed to IRAs during their careers. Many advisors recommend that an investor roll such plans into an annuity when they near retirement. This article will review the potential advantages and disadvantages of such rollovers.

First, let’s review why folks contribute to IRAs to begin with. The primary reason is the ability to contribute investment dollars tax-free, and for the investment to grow tax-free. For example, money contributed to an IRA is done pre-tax – the investor does not pay income tax on these funds when they are contributed. Taxes are paid when the funds are eventually withdrawn, but for most this is done during retirement years when the investor’s tax bracket is lower. Also, investments in an IRA grow tax-deferred – resulting in a significantly higher retirement nest egg than an identically-performing investment whose gains are taxed. Most IRAs are invested in individual stocks or in mutual funds.

With that in mind, let’s explore three major advantages of rolling an IRA into an annuity.

Insurance on Your Retirement

First and foremost, rolling an IRA into an annuity contract provides insurance on your retirement investment. The two largest assets of most households are the house and theIRA (or other employer-sponsored plan). Most people wouldn’t dream of not having insurance on their home (in fact most mortgage lenders require homeowners to carry home insurance, and many states require it as well). Yet many investors approaching retirement have no insurance on their retirement plan; rather, it can fluctuate based on the fund manager and market dynamics. Annuities can provide protection in a down market, guarantee lifetime income, and the ability to guarantee a certain amount is passed on to heirs. These can be a considerable advantages to all investors, but in particular those who have accumulated substantial assets and then have the misfortune of retiring in a down market.

Lifetime Income and Inflation Protection

Secondly, by rolling an IRA into an immediate annuity or variable annuity with a lifetime income benefit, an investor can enjoy an income stream based on a predetermined and guaranteed rate, even in a down market. Recent market turbulence only serves to strengthen this point. Throughout the country, millions of workers approaching retirement have discovered that their plan balances are now too low to provide them with the income they need when they stop working. Furthermore, in addition to providing protection to one’s beneficiaries, certain immediate annuities have inflation adjustment features to ensure that lifetime income keeps up with increased cost of living.

Tax-Free Rollovers and Continued Tax-Deferred Growth

Rolling an IRA into an annuity is also a tax-free process. Annuities funded with an IRA rollover are “qualified” plans. This enables insurance companies to create “IRA annuities” into which an investor can directly deposit their retirement funds. Additionally, there are no distribution taxes either. While pension and other pre-tax distributions can be subject to taxation when withdrawn, federal law permits prospective investors to roll their payments into an immediate annuity tax-free. And of course, the funds within the annuity will continue to grow tax-deferred.

Things to Consider Before You Roll Over Your IRA

When considering all of the advantages of rolling an IRA into an annuity, be aware of the following potential issues:

  • Many variable annuities have surrender fees – penalties for withdrawing your money too early. Be sure to understand any surrender fees when considering a roll-over into a variable annuity. (For more on surrender fees, click here).
  • Be sure and consider the fees associated with an annuity and any additional riders you may be considering. Variable annuities often have higher fees than mutual funds, although typically these fees come with features that mutual funds don’t offer, like lifetime income and death benefits. Nonetheless, always make sure that the fees associated with an annuity you are considering are worth the additional features.
  • Remember that immediate annuities are irrevocable – if you roll your IRA into an immediate annuity, you are giving up access to the principal in return for guaranteed income.

The decision whether to roll an IRA into an annuity should never be made alone – always consult with a trusted and knowledgeable financial advisor. And you can always contact an Annuity FYI Expert for a free, unbiased opinion – call us at 866 223-2121 or e-mail us here.

Additional Resources

Your Guide to 401k & IRA
401k Rollover — Is It Right for Me?
Retirement Crisis: Myth or Fact?