Even if you possess a substantial net worth, the real key to a worry-free retirement is knowing that you can count on a set amount of income for the remainder of your lifetime – regardless of how long that may be.
That’s where an annuity can come in. Annuities can provide you with income certainty – no matter what is happening in the stock market or with interest rates in the economy. Because of that, many retirees opt to “rollover” money from an IRA (Individual Retirement Account) or a 401(k) plan to an immediate annuity, where income starts paying out right away.
So, while 401(k) plans are typically used for saving money in a tax-advantaged manner, and annuities are known for paying out a stream of income, does it really make sense to “combine” the two by placing an annuity inside of a 401(k)?
How the SECURE Act Tweaked Retirement Planning
The Setting Every Community Up for Retirement Enhancement, or SECURE Act took effect in January 2020. Among its many provisions – which included increasing the required minimum distribution age from 70 ½ to 72, and allowing retirement benefits for long-term part-time employees – it also relaxed the rules for employers that offered annuities in company retirement plans.
In the past, financial advisors and employer-sponsored retirement plans shied away from placing annuities in 401(k)s and other similar plans, primarily because these financial vehicles already allow tax-deferred growth. Therefore, there was no real “benefit” to placing an annuity in tax-advantaged accounts.
But now, with the near disappearance of defined benefit pension plans, many retirees could be at a loss when it comes to converting the money they’ve saved into employer-sponsored retirement plans. So, including annuities can actually offer some help.
For instance, retirement plans that include annuities are now required to provide an estimate of the participant’s future monthly income, based on their current account balance. In addition, fixed indexed annuities can also offer the opportunity for market-linked growth without the risk of loss in a downward-moving market.
Being a type of fixed annuity, fixed indexed products are also able to generate income for life. So, this, too, can be a win-win situation – especially as income from Social Security becomes more uncertain for retirees.
Items to Consider with Annuities in Retirement Plans
Given all of the potential advantages, there are some other items to consider before you dive headfirst into an annuity within your 401(k) plan. These factors should ideally include:
- Surrender charges
- IRS early withdrawal penalty
Taxes are oftentimes a major concern when it comes to taking withdrawals from a savings or investment account. In the case of an annuity within a 401(k) plan, it is probable that 100% of a withdrawal that you make will be taxable. This is because none of the funds – either from contributions or from gains – have yet been subject to taxation.
As with most other insurance-related financial vehicles, annuities will typically come with surrender charges if you cancel the contract altogether, or if you withdraw more than a maximum amount per year.
Usually, though, the amount of an annuity’s surrender charge will decrease over time until it eventually disappears. With that in mind, annuities – even those that are inside of a 401(k) plan – should always be considered a long-term financial commitment.
In addition, if you withdraw funds before turning age 59 ½, you could also incur an additional 10% “early withdrawal” penalty from the IRS. So, this could further diminish the amount of money you actually put in your pocket from an annuity withdrawal.
Should You Consider an Annuity in Your 401(k) Plan?
If you’re still considering whether or not an annuity would be a viable option in your employer-sponsored retirement plan, Annuity Gator can help. We specialize in educating consumers and financial professionals about how annuities work, and where these financial vehicles may or may not work well.
So, if you’d like to learn more, please feel free to contact us directly and schedule a time to chat with an Annuity Gator retirement income specialist. We can be reached by phone at (888) 440-2468 and via email by going to our secure online contact form. We look forward to helping you create your retirement savings and income strategy.