Upon retirement or changing jobs, a roll over of the balance from your employer sponsored plan (such as your 401k plan), can be made to a variety of acceptable plans, including to an IRA, an IRA annuity, another qualified plan, a 403(a) annuity plan, a 403(b) annuity contract, or certain governmental 457 plans.
Annuities funded with a 401(k) or IRA 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 retire and have your employer rollover 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. This is called a direct IRA rollover and is the manner in which you want funds transferred from your employer sponsored plan — directly to the insurance company issuing your annuity.
When the ira rollover is done as a direct rollover, there is no tax on the distribution.
The rollover can be to a deferred annuity, which may continue to grow tax deferred for years (with mandatory distributions starting at age 70 ½) or can be to an immediate annuity if you which to start receiving payments right away). You may also choose a fixed annuity or a variable annuity.
Locating and purchasing an IRA annuity is usually done through an insurance agent. GE and ING are two large issuers of qualified annuities. There are also many annuity shopping web sites. In the case of a deferred annuity with a stated interest rate, it is possible to obtain a “rate hold” from some insurance companies. Usually, the quoted rate is maintained for several months, typically one to three, while the cash transfer takes place from your employer-sponsored retirement plan. “Rate hold” periods typically begin once the insurance company is in receipt of all required forms.
Special Benefit to those Under age 59 1/2
In process of making your rollover, if you want to take any funds for your own use and you are under age 59 ½, you will incur a 10% penalty plus income tax on the funds taken.
However, you can avoid the 10% federal penalty tax by taking one of two steps: Your first option is to transfer your IRA or 401(k) into an immediate annuity, sold by an insurance company and which includes a “life contingent” payment option. As long as you receive the income periodically over your lifetime, you will avoid the 10% penalty tax on the money you receive. This option makes sense if you are ready to retire and seek income right away.
Remember that you must choose an annuity which will pay out over the course of you’re your lifetime and not an annuity which only makes payments for a limited certain or specified number of years. Another course of action is to rollover IRA to any eligible retirement plan and withdraw amounts which do not exceed the IRS 72t or 72q rule levels.
Note that at first, having an annuity as an IRA investment seems redundant as the tax deferred nature of an annuity is unnecessary inside a tax deferred IRA.
However, John Huggard, estate planning attorney and author of “The Truth About Variable Annuities–Debunking The Myths,” Parker-Thompson Publishing, disagrees: “The duplication argument would have validity only where a variable annuity offered some income tax deferral as its sole benefit,” he said.
However, Huggard stresses that people put a variable annuity inside a tax-deferred IRA or 401 (k) to get insurance coverage. They are willing to pay the annual fees and charges to protect principal.
Those guarantees include:
• The guaranteed death benefit.
• Guaranteed minimum withdrawal benefits.
• Guaranteed minimum income benefits: With these, an annuitant can receive a guaranteed dollar amount in monthly income–regardless of how the variable annuity investments perform.
Learn more about IRA to Annuity Rollover Rules. Get your free copy “Six Best and Worst IRA Rollover Decisions“
