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Layin’ It on the Line: Stepping toward a stress-free retirement: A simple guide to rolling your IRA or 401(k) into an annuity

By Lyle Boss - Special to the Standard-Examiner | Aug 16, 2023

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Lyle Boss

Rolling your individual retirement account (IRA) or 401(k) into an annuity may sound complicated, but fear not — it may be straightforward and tax-free if done correctly. There are a couple of ways to do this: through a direct transfer or a qualifying withdrawal.

You’re more of an observer than an active participant in a direct transfer. Your financial institutions take care of the transfer after you’ve signed off on the necessary paperwork. Simple, right?

A qualifying withdrawal, on the other hand, means you take control of your retirement funds (after the IRS potentially withholds 20%). You have 60 days to put that money into an annuity to avoid tax headaches. And don’t worry; you’ll get back any funds the IRS holds when tax season rolls around.

But why would you want to convert your IRA or 401(k) into an annuity in the first place? An annuity may be part of your IRA; you simply change the investment vehicle. This can be done with no tax liability because it would still technically be an IRA. If you withdraw funds from a qualified account, you must pay the tax liability. The remaining funds can then be deposited in a (nonqualified) annuity, and in doing so you remove the need for a required minimum deposit.

You might be asking, “What’s in it for me?”

Good question. There’s a laundry list of potential benefits.

Firstly, one of the biggest concerns for retirees is income certainty. Stock markets can rise and fall unpredictably, but an annuity might offer you a steady, guaranteed income, taking the roller coaster ride out of your retirement planning. So, it might be an excellent way to kick back and enjoy retirement without keeping a nervous eye on Wall Street.

Secondly, there’s this pesky thing called longevity risk — the risk of outliving your savings. The horror, right? But annuities come to the rescue here too. Your annuity payments may last as long as you do or even extend to your spouse’s lifetime. This isn’t something your typical stocks and bonds guarantee.

Thirdly, annuities might allow you to extend your tax deferral benefits if your funds are deposited in a nonqualified annuity. If you stick with traditional retirement accounts, there are mandatory minimum distributions you have to start taking at a certain age — which may mean more taxes.

And finally, annuities are customizable. You may structure them to cover you and your spouse or include certain riders like a death benefit or cost-of-living adjustment. It’s all about finding what suits your needs.

But of course, annuities aren’t for everyone, and it’s important to understand the potential downsides too.

Consult a licensed and authorized financial professional before making any final decisions. They’ll guide you through the rest of the process, and before you know it, you might be enjoying the peace of mind that comes with a guaranteed income stream, no market volatility and the knowledge that you’ve got your retirement finances sorted. Happy retiring!

  • Converting your IRA or 401(k) into an annuity may be straightforward and tax-free if done correctly. This strategy could provide benefits such as a guaranteed income stream, longevity risk mitigation and customizable investment structures.
  • While annuities may provide significant advantages, they also have potential downsides like complexity and less liquidity. It’s important to fully understand these before making a decision.
  • If considering an annuity rollover, consult with a financial advisor to understand its implications for your unique situation, and shop around to find the best annuity plan from a strong insurance company. Your chosen annuity team should guide you through the rollover process.

Lyle Boss, a native Utahn, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.


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