Rolling Your 401(k) Into An Annuity? Here’s What You Need To Know

While some insurers will issue an annuity for as little as $10,000, the reality is it usually takes a six-figure investment to produce a meaningful income in retirement.

For the average American, the bulk of their net worth isn’t sitting in cash — it’s tied up in a 401(k) or similar employer-sponsored retirement plans. In 2022, 60.3 percent of households owned a retirement account, with a median value of $75,000, according to Census Bureau data. So for those looking to fund an annuity, a rollover from a workplace plan is one way to do it.

Rolling over a 401(k) or IRA into an annuity can be done tax-free if the transaction is structured correctly. However, the strategy isn’t right for everyone, and it requires a close look at IRS rules, contract terms and the long-term trade-offs.

How to roll your 401(k) into an annuity

Rolling an IRA or a 401(k) into an annuity can be straightforward, but only if you follow the IRS-compliant process. Done correctly, you won’t owe taxes or penalties.

You can perform the rollover in one of two ways: a direct transfer or an indirect rollover through a qualifying withdrawal.

Ideally, you want to make sure the money never gets treated as ordinary income in your hands. If it does, you run the risk of owing taxes and a 10 percent penalty to the IRS if you’re under 59½.

How a direct transfer works

This is the easiest option. A 401(k), IRA, 403(b) or similar qualified retirement plan can be rolled over into another qualified plan, including a qualified annuity contract.

If done as a direct rollover, the money is not taxed at the time of the rollover.

Here’s how the step-by-step process works.

1. Pick an annuity: Choose the type of annuity (immediate, deferred, fixed, fixed indexed) based on fees, guarantees and your payout goal. Then, have the insurer set up the new qualified annuity account. Get the receiving account number and transfer instructions in writing.
2. Ask for a direct rollover: Ask your current 401(k) plan for a trustee-to-trustee rollover. Do not take possession of the money. If they mail a check, it should be payable to the new custodian, not to you.
3. Handle RMDs before moving money: If you’re in required minimum distribution territory, take the current year’s RMD first. RMDs can’t be rolled over.
4. Complete the paperwork: Submit the plan’s distribution forms and the insurer’s transfer packet. Make sure all required forms and supporting documents are submitted, and follow up on any additional steps.
5. Verify funding and contract terms: Confirm the exact dollar amount received and the issue date.
6. Keep proof: Save transfer request, tracking information and confirmations in case you ever get audited by the IRS.

Once complete, the annuity contract is set up in your name, and your retirement savings are no longer in your employer’s plan — they’re in the annuity, ready to start building toward income payouts.

How a qualifying withdrawal (indirect rollover) works

An indirect rollover is trickier. In this scenario, you take a distribution from your 401(k) and then deposit it into the annuity yourself.

If the distribution is paid to you, the plan must withhold 20 percent for taxes, and you only have 60 days to redeposit the full amount (including replacing the withheld portion from other funds) into the annuity to keep it tax-deferred.

Miss the 60-day deadline, and the distribution becomes taxable income. If you’re not yet 59½, you’ll also face a 10 percent early withdrawal penalty.

That’s why most people avoid this method unless they have a very specific reason and they’re confident they can hit the deadline.

In-plan annuity rollovers

Some employers now offer annuities inside their 401(k). In that case, contributions or transfers happen within the plan, which can be much simpler than an outside rollover.

Allianz, for example, offers an in-plan fixed indexed annuity option where contributions are made through the plan recordkeeper. While not all employers offer annuities in 401(k)s, the option is becoming more popular. After Allianz launched its Lifetime Income+ Annuity in 2022, it expanded access in 2024 through a partnership with Empower, one of the largest retirement plan administrations in the U.S.

What to keep in mind when you roll a 401(k) into an annuity

• Timing is important: Not every 401(k) plan lets you roll over funds while you’re still working. Some require you to leave your employer — either through retirement or job change — before you can move money into an annuity. If you’re planning ahead, check with your HR department or plan administrator before getting too deep into the process.
• Speak with a financial advisor: Annuities are complex financial products and rollovers can be tricky. Having a financial advisor in your corner can help you evaluate whether rolling funds over is even the right move. A good advisor will also point out alternatives, like partial rollovers or balancing annuities with other income strategies.

Benefits of rolling your 401(k) into an annuity

Rolling your retirement savings into an annuity can give you peace of mind, especially if you’re worried about making your money last. Here are the key benefits:

• Annuities are designed to pay income for life, which reduces the risk of running out of money.
• Funds from a 401(k) rolled into an annuity remain tax-deferred until you start taking withdrawals.
• A portion of your retirement savings can be placed in a qualified longevity annuity contract (QLAC), which is exempt from RMD rules until age 85. This lets you delay taxes and secure income much later in retirement.
• Annuities require large amounts of money to produce a meaningful monthly income. Tapping retirement account funds can make it easier to fund the annuity contract.

Drawbacks of rolling your 401(k) into an annuity

Despite their potential benefits, annuities come with downsides, and you need to understand them before committing.

• Some annuities carry ongoing annual fees and expenses. These costs eat into your returns.
• Many annuities penalize you if you withdraw funds early. The surrender period can last for years, tying up your money or making it expensive to access.
• There’s no additional tax advantage because a 401(k) is already tax-deferred. Moving it into an annuity doesn’t give you extra tax breaks.
• Stocks and index funds in a 401(k) could have higher long-term returns. Annuities trade growth potential for safety and income. If you’re younger, that’s a big opportunity cost.

Does rolling a 401(k) into an annuity make sense for you?

There’s no one right answer. Rolling your entire 401(k) into an annuity could be a smart move if you’re risk-averse, close to retirement, want guaranteed income and have access to more liquid assets elsewhere in your portfolio.

But if you’re younger and can stomach volatility, tying up everything in an annuity might backfire. If you’re younger, you may be better off leaving your 401(k) invested, diversifying your portfolio and waiting until later in life to consider annuities.

Instead of rolling over your entire account, you can roll over just enough to close your projected income gap in retirement. That way, you secure steady income while keeping the rest relatively liquid and invested for growth.

Also consider other sources of retirement income — Social Security, pensions, part-time work or rental income. If you already have reliable income streams, an annuity may not be necessary.

Finally, it’s important to consider the type of annuity you’re rolling into, and whether its features fit your broader financial picture. Shopping around for the right annuity can save you thousands of dollars in the long run. Compare fixed, variable and indexed annuities. Look at whether you want lifetime income, inflation protection or flexibility for beneficiaries.

Bottom line

Rolling your 401(k) into an annuity might sound like a safe, conservative move, but it can be risky if you don’t think it through. It can give you guaranteed income and protect against running out of money, but it also comes with restrictions and less growth potential.

Before committing to an annuity contract, weigh your personal situation, talk with a financial advisor you trust and shop around.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.