How to do a 401k Rollover to an Annuity

Have you been thinking about protecting your 401 (k) to with an annuity? A lot of people are asking about this today. And with good reason. With the market going absolutely bonkers, the thought of their 401k running out of money in retirement is something that has become very real.

Baby boomers saw their parents retire with Defined Benefit pensions. Those pensions paid them a set monthly amount—no matter what happened in the market or the economy. That money just showed up. Simple. Secure. Guaranteed.

Wall Street spent years telling people annuities were a bad idea. But after all the market crashes in the early 2000s, people started to look at them differently. And they began to ask better questions.

Now that the market is experiencing major shifts, people are doing a lot more research. They’re realizing annuities have been around for centuries. And nearly every economist who studies retirement agrees you should have one in your plan.

The only debate? What type of annuity should you choose—and how much of your money should you put into it?

The SECURE Act Made 401k-to-Annuity Rollovers Easier

The truth about annuities is finally coming out. And it’s the opposite of what Wall Street used to say. Even the federal government is making it easier for people to use annuities.

The SECURE Act, passed in 2019, created a pathway for annuities to be offered inside 401k plans. This matters because the government knows most people won’t have a pension. They’ll only have Social Security, which, by the way, is an annuity.

When the government sees a problem coming, it often uses the tax code to fix it. Just like it gives tax breaks for life insurance and long-term care, it’s now creating incentives to help people create more guaranteed income in retirement.

That’s why this change to the 401k system is a good one. It helps retirees avoid relying only on Social Security.

Option 1: Use the Annuity Inside Your Current 401k Plan

There are two ways to fund an annuity with your 401k. The first option is to use an annuity that’s already offered within your current 401k plan.

But here’s the problem: Most 401k plans only offer a few annuity choices.

For example:

• • If your 401k is managed by Fidelity, you might only see five annuity companies to choose from.

• • There are over 200 annuity companies out there.

• • Your plan might not offer the best annuity for your needs.

And not all annuity companies are equal. Some are strong on guaranteed income payouts. Others are not even in the top 20. It depends on when you retire and when you want to start your income.

If you’re thinking about doing an internal 401k annuity funding, you need to:

• • Get a quote from your 401k provider.

• • Then get a second opinion from someone independent who can compare all the top companies side by side.

That way, you’ll know whether or not you’re getting the best deal for your money.

The second option is to roll over your 401k into an annuity offered outside of your plan.

A lot of people worry this might trigger a tax bill. But if you do it correctly, that won’t happen.

This type of transfer is called a direct transfer or custodian-to-custodian transfer. The money goes straight from your 401k provider to the annuity company. That means:

• • No taxes are owed at the time of the transfer.

• • You only pay taxes when you actually take money out.

Here’s how it might look:

Step	Action	Tax Consequence
1	Move money from 401k to annuity	No taxes if done right
2	Start income payments in retirement	Income is taxable then

Just like with Option 1, it’s important to get a second opinion here. Your money manager or accountant might only offer a few annuity products. But working with an independent annuity expert lets you shop the entire market.

This can make a big difference in how much income you get.

Why a Second Opinion Could Boost Your Income by Thousands

Getting a second opinion isn’t just about shopping for the best rate—it can lead to smarter strategies.

Take this real example. A couple was advised to put a portion of their 401k into one annuity. That would have given them $24,500 per year for life.

Not bad. But we looked at it differently.

By splitting the money into two annuities, we were able to do something smarter:

• • Annuity #1 paid the same $24,500 per year for the first 10 years.

• • Annuity #2 started in year 11 and paid $28,000 per year, for life.

Over a 20-year period, this second strategy gave them $70,000 more in income!

Strategy	Total 20-Year Income
Single Annuity	$490,000
Split Annuities	$560,000
Extra Income	$70,000

That’s money they would’ve missed without asking for a second look. This kind of planning can make a huge difference in retirement.

So no matter what you decide, get a second opinion from someone who specializes in annuities. It could be worth tens of thousands of dollars in extra income, without you spending a single extra dollar.

If you’d like me to take a look at your options with you, just schedule a call using my online calendar, and we’ll go over your situation together.

Podcast Episode # 68: How to do a 401k Rollover to an Annuity

Download Podcast Episode # 68 How to do a 401k Rollover to an Annuity on Apple Podcast