Rollover 401K to Annuity

401k Rollover — Is It Right For Me?​

What is a 401k and How Does It Work?
Let’s start with the basics. A 401k plan is an employer-sponsored retirement plan that allows you to save money for retirement while deferring income taxes on the savings until the time of withdrawal. As an employee, you can opt to have a portion of your income paid directly into the 401k account. Employer-sponsored plans can either be participant-directed (where you choose from a variety of investment options) or trustee-directed (where assets are investment by a board of trustees). Investments typically consist of mutual funds focusing on stocks (including, perhaps, your company’s stock), bonds, and money market funds or stable value investments.

What is a 401k Rollover and When Can It Occur?
A 401k rollover refers to the process of taking the money out of your 401k and moving it into a different retirement plan. This typically takes place when you leave your company or retire, and is also referred to as “separation of service.” There are several rollover option s available to you once you separate from service:
 
Take the Cash
With a lump-sum payout, you can count on losing a huge chunk of your savings to taxes. If you are over 59 ½ and you choose to cash out the 401k, it will be taxed as current income. Your company will deduct 20% of your savings and hand it over to the IRS as a pre-payment on your income taxes. If you choose to reinvest you will have a lot less money to work. If you are under 59 ½, you may be forced to pay a 10% “early withdrawal” penalty, in addition to the 20% paid to the IRS. If you take the cash all at once, you will be required to report the entire amount on your income taxes for that year. This amount, in addition to your other annual earnings, can bump you into a higher tax bracket. In either case, cashing out your 401k is generally one of the worst decisions you can make when it comes to optimizing your retirement dollars.
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Leave the Money in the 401k
When some people leave their job or retire, they leave their money in their 401k plan. Your current company is obligated to let you keep your money in its plan, even if you leave, as long as it exceeds $3,500. If you go to a new employer, you can usually transfer your old 401k money into the new employer’s 401k account. You will now have the advantage of one account statement instead of two, and your investment options will be different in the new plan. But keeping your money in the 401k is, next to cashing out, the second worst thing you can do with you retirement money. The money is still restricted to a defined set of investment options dictated by your company’s plan. All 401k plans have limited investment options, no safeguards against losing your principle, and no income protection for your retirement years

Advantages of the 401k Rollover Annuity:

1. Guaranteed Principal: Principal is guaranteed with a 401k rollover annuity, while principal is not guaranteed with mutual funds, stocks, or bonds associated with your 401k or IRA investment.
2. Flexibility: When you roll your 401k plan into an IRA within a variable annuity, you have the power to change your investments depending on the investment climate or your personal goals. For example, you can select a fixed interest rate account, or have the option of splitting up your account between market indices, actively managed funds, asset allocation models and fixed interest account(s).
3.  Income Protection: With the best variable annuities with living benefit riders or immediate annuities with life contingencies, you cannot outlive your money. As long as you are alive, the insurance company is obligated to send you a check every month.
4. Death Benefit Protection: With the top deferred variable annuities, for an additional fee (usually 0.25% to 0.75% per year), most insurance companies offer what are referred to as “Enhanced Death Benefits.” These benefits vary from 3% to 7% on either a simple interest or compounded roll-up that grow to age 80, 85 or even 90, or the highest monthly, quarterly or annual account value. A couple of companies will even lock in the highest anniversary value and then pay you 5% or 6% off of the new, higher value.

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Roll It Into an IRA
An option that is usually better than leaving your money in the 401k is to roll it into an IRA (Individual Retirement Account). There are a wide variety of IRA investment options out there, and you can choose one that you like, rather than be tied to the investment options pre-selected in your 401k. However, IRAs do not provide safeguard of principal or benefits such as income protection as you get older.

What Is A 401(k)-to-IRA Rollover? Should You Roll Over?
Learn all about rollover IRAs. For most people retiring or quitting their jobs, it makes sense to roll over a 401(k) plan into an IRA, to save money on fees and get access to a greater variety of investments.
When you leave a job or retire, you have to decide what to do with the money you’ve saved in your 401(k). You usually have three options:
 
Leave it where it is. Roll it to a 401(k) at your new firm. Roll it into an IRA, a process called an IRA rollover.  
For most people, it makes sense to do a rollover of your 401(k) plan into an IRA, so that you can save money on fees and get access to a greater variety of investments.

The Difference Between 401(k)s and IRAs
First, it’s important to understand the difference between a 401(k) and an IRA. With a 401(k), your company’s administrator runs the plan, choosing which mutual funds and other investments are available, and setting rules about withdrawals. If you have an IRA, you are in charge. You can hold your IRA at a bank; a brokerage, like Merrill Lynch or Fidelity; or an online advisor, like Betterment. 

​The big advantage of a 401(k) is the company match—if you have one—and the automatic deductions made from your paycheck. If you’re no longer employed with a company, those advantages disappear. So your decision should come down to which kind of plan helps you keep and grow your investments over time, how high the fees are and how easy it is manage your money.

What Is a 401(k)-to-IRA Rollover?
An IRA Rollover is when you move money from a 401(k) (or similar plan) to an IRA. When you do a direct rollover to a Traditional IRA, no taxes need to be paid. Your assets and money just move from one type of account to another and you keep all of your tax benefits.




 

​Roll it Into an Annuity
When you leave your job for a new one, or retire, you have a one-time opportunity to take the money from your 401k account and transfer it into a better investment vehicle, like investments with more flexible investment options, safeguards against losing your principle, and income protection for your retirement years. We firmly believe that investors retiring or changing jobs should at a minimum look into seizing the opportunity to transfer their investment dollars out of the generally restrictive 401k plans, and into more flexible plans such as annuities. Rolling your 401k into an annuity gives you a continued tax shelter, while permitting you a huge range of investment options, guarantee of principle options, and living and death benefits that can protect you and/or your family whether the stock and bond markets go up or down and regardless of whether you live or die.
If you choose to roll you 401k into an IRA annuity there are two primary types, Immediate and Deferred. With an Immediate Single-Life Annuity, you will receive one check per month for the rest of your life, no matter how long you live. The amount of this monthly check is determined by the size of your account, the interest rates at that time, and your life expectancy. With a joint-and-survivor annuity, the amount of each check will be 10% to 15% smaller because they will be sent every month for as long as you or your spouse is alive. You can also opt for a life with 5, 10, or 20-year certain contract, which will guarantee that monthly checks are sent to your heirs after you and your spouse are deceased. With an immediate annuity you are giving up control of your principal and therefore it is important to understand that you are giving up all of your money in exchange for a series of payments. With a Deferred Annuity you maintain control of your principal, and can receive guaranteed payments while benefiting from potential upside in the stock market. This is accomplished through the purchase of additional riders that will guarantee at a minimum a 5-7% worst-case return on your money, but if the market does better you are guaranteed the higher return and can lock in your new higher principal value to increase your income.
A word of caution: always check with your company prior to making a rollover to see if they offer a payout that is higher than you could get from insurance companies. Most financial advisors won’t suggest this possibility, because if your company’s payment is higher the advisor won’t get a commission. Once you roll over your 401k you can’t roll it back, so look before you leap! If your employer does not offer to annuitize your 401k, you can take a lump sum payout from your 401k and use the funds to purchase an annuity contract — just be sure and do so within 60 days of the 401k distribution to avoid any taxes, and be sure the check is made out to the new custodian FBO (for benefit of) you, so that the IRS will not deduct 20%.

The Quality of Investments
Unless you work for a company with a very high-quality 401(k) plan—usually these are the big, Fortune 500 type of firms—you will probably find there are more kinds of investments available to you through an IRA.
 
For instance, you can often buy an annuity through an IRA. Annuities can give you an income stream during retirement in exchange for a lump sum paid up front, though you need to be careful to consider fees and the impact of inflation on your annuitized payments.
 
The Rules of the 401(k)
Most 401(k) plans go by these rules:
 
If you have less than $1,000 in your 401(k), an employer is allowed to cash it out and give it to you. It will be subject to taxes.
If you have between $1,000 and $5,000 in a 401(k), your employer is allowed to automatically put it in an IRA.
If you have more than $5,000 in a 401(k), you must decide whether to leave it in the 401(k), do a rollover to your next employer’s plan or do a rollover to an IRA.
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Other rules may be more specific to your plan. For instance, some 401(k)s set limits on how easily you can withdraw money and how large a sum you can withdraw at once. Ask your 401(k) plan administrator for your plan’s rules. If you are changing jobs, ask at both the new company and the old company before you decide what to do.
 
Two Advantages of an IRA
If you chose the IRA rollover route, you can keep making contributions to your IRA, receiving a tax deduction up to $5,500 ($6,500 if you are 50 or older), in years when you are self-employed.
 
If you need your retirement money in an emergency before you are 59½, it is also usually easier and faster to withdraw it from an IRA than a 401(k).
 
Two Advantages of a 401(k)
Some plans allow you to borrow against the money in your plan. In an emergency, this could be a good alternative to taking a taxable distribution.
 
Some 401(k)s also have higher protections against creditors if you declare bankruptcy.
 
Check with your plan administrator for the rules and your state’s laws.
 
Setting a Rollover Strategy in Your Working Years
If you are younger, you should consider setting a rollover strategy. Americans change jobs about 11 times over their careers. If you’re smart, you started a 401(k) at every job, especially if your employer matched your contributions. This year, you can put up to $18,000 into your 401(k)—$24,000 if you’re 50 and older—in addition to any match.
 
If you change jobs a few times, consolidating your savings by rolling them into a single IRA will make it much easier for you to manage.

If You Are Retiring: One Rule Of Thumb
One good rule of thumb that can help simplify the decision about whether to do an IRA rollover when you are retiring: The larger your company and 401(k) plan, the cheaper and better it probably is.
 
If you are retiring now from a company with a superior plan and have just one large 401(k), give serious consideration to leaving the money where it is.
 
Best Places to Roll Over a 401(k)
Let’s say you’ve decided to move your money from an employer-sponsored 401(k) plan to an IRA that you control yourself. The mechanics of the rollover are easy: Your plan administrator will have paperwork for you to fill out. Once you have opened your IRA, he or she will handle the transfer. Let’s look more specifically at the bigger decisions to make and the points to consider.

Low-Cost Rollover Options
Your first decision is where to put the IRA: with a bank, brokerage or online financial advisor. One factor to bear in mind is the administrative and management fees each institution charges. Amounting to as much as one percent to two percent of your portfolio, these investment costs can eat away at your savings (it’s like the magic of compound interest, only working against you instead of for you). Even worse, with most management fees, you never see them: They just get deducted from your account. Fees tend to be lower with online plan administrators because they have less overhead, but brick-and-mortar companies do offer face-to-face interaction (see more on customer service, below).
 
The particular funds you invest in carry fees and charges, too. But the good news here is that there are plenty of low-cost options among fund providers, and the costs keep coming down every year. Big mutual funds and ETFs (exchange-traded funds) can now have annual costs of 0.15 percent or even lower. For example, Fidelity offers 17 funds that have an expense ratio of 0.10 per cent or less. These differences may sound small, but they really add up over time.
 
IRA Investment Options
The next important consideration is finding somewhere with good investment options that work for you. This is rarely about the number of choices. Most brokerages offer a wide range of options. For example, E*TRADE offers more than 9,000 mutual funds, not to mention every stock and option that trades on the major exchanges.
 
The real question becomes how you narrow down these options and find the right fit for your needs. For many people, lifecycle funds (also called target-date funds) are a great choice. You chose a fund based on the year when you want to retire and the fund does the rest. It automatically chooses investments for you, rebalancing over time as you get closer to retirement.
 
For example, it may invest you more heavily in equities when you are 20 years from retirement, since they offer better returns on average. Once you get closer, say within five years, the fund will shift to lower-risk investments, such as bonds, to preserve your return and start providing income.
 
While lifecycle funds have a professional fund manager deciding when to rebalance, a new class of “robo-advisors” rely on sophisticated computer algorithms to manage your portfolio. The best known of these, Forbes Financial , will ask a few questions about your particular situation, then build a custom portfolio it thinks will perform best for you.
 
Rollover Customer Service
The actual process of doing an IRA rollover isn’t all that cumbersome, but it can still be a bit confusing at times. And there can be complications or confusion along the way.
 
In these situations, you want to make sure that there is someone to help you with your rollover who is watching out for your best interests. First, if you are dealing with a financial planner or advisor, make sure that they are acting in a “fiduciary” role. This means that they are putting your financial interests first and must help you find the best investments possible. New regulations from the Department of Labor mandate that all advisors dealing with retirement accounts be fiduciaries, but it’s still best to check.
 
Many of the big brokerages also have special rollover help desks that can guide you through the process and assist you when you get stuck. Some even perform a complimentary, one-on-one portfolio review. Most financial firms really want your IRA business, so make them earn it.
 
The Bottom Line
A 401(k)-to-IRA rollover occurs when you move the money from a 401(k) run by your employer to an IRA at a bank or brokerage that you control yourself. Most rollovers happen when people retire or change jobs.
 
A rollover usually doesn’t trigger taxes or raise tax complications, as long as you stay within category. That means you move a regular 401(k) into a Traditional IRA, and a Roth 401(k) into a Roth IRA.
 
You should consider a rollover if it makes it easier for you to manage your money, helps you save on fees or get access to better, lower-cost investment options. If you decide you want to do an IRA rollover, your next decision is where to open the account, and how to get the most bang for your IRA bucks.

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