Should I transfer 401(k) funds into an annuity?
At age 60, is it wise to transfer $70,000 worth of 401(k) funds into an annuity? I would do this in order to retire at 62 and use the funds for medical insurance premiums. I also have a $250,000 annuity, long term care policy.
Good question. It is one that should be asked more often.
The old saying is that Annuities are sold not bought. The reason that they are often sold is due to the commissions that the salesman generate, which can be over 6%.
Keep in mind, there are different types of annuities such as a fixed, variable, and indexed annuities. Each have different selling points. Since you mentioned the purpose would be to pay for medical premiums, I am guessing that you are thinking of a fixed annuity.
I would not recommend a fixed annuity, which has a fixed pay out each month, quarter, or year to pay for insurance that will have rising premiums. Lets say that your health premium is $800 a month the first year, but next year is $1,000, and the following year is $1,000. If you do not have access to additional dollars, you will not be able to afford to pay the rising premiums.
Without more info, I can not be more specific, but in general, NO I would not covert $70,000 to an annuity.
I'm not a fan of your proposed strategy, here's why:
It's likely that the most attractive feature of adopting an annuity is the tax-deferred growth of investments within the annuity. However, your 401(k) already has this feature and it would continue to see tax-deferred growth if you rolled it into an IRA. Thus, you're paying the fees for an annuity and one of the most attractive features is something you don't require because you already have it.
Now, if you believe that the insurance company offering the annuity can achieve a better investment experience than you can personally, this is a different story.
What I would suggest doing is this; consider who your contact is that is advising you to get an annuity (perhaps it's the individual that set up your existing $250K policy). How is this person compensated? It's likely that they only make money if you buy a product, so it's very hard for them to avoid conflicts of interest. I'd suggest speaking with a fee-only advisor, allowing them to take a look at your broader financial picture, and then make an informed decision with the input of a professionals with varying backgrounds.
Adam Harding, CFP
Thank you for submitting your question. I would be careful about transferring funds into an annuity. On the surface, nothing is inherently wrong with annuities. However, "purpose" is key! You want to understand what the benefits of owning an annuity are, as well as some of the pitfalls, such as those hefty surrender fees that would be assessed against your principal if you need to take a withdrawal that exceeds the usual annual 10% free withdrawal option.
Before suggesting that anyone transfers 401(K) assets into an annuity, any financial advisor worth his/her license and title should seek to learn the following about you:
- What are your income needs?
- What are your expenses?
- How soon will you need to start withdrawing income from the annuity?
- Does the funds that you are considering transferring to an annuity meet your future withdrawal needs, assuming that you receive a modest return, such as 5%?
- Do you need a "bonus" added to the initial premium that you are considering paying to set up the annuity (the "bonus" usually increases the "income base" of the annuity for withdrawal purposes)?
- Have you done adequate estate planning with the assistance of an attorney (before committing funds to an annuity, it would be best to complete your estate planning, e.g. Will, Living Trust, etc.)?
- When will your other $250K annuity be free of surrender charges penalties?
I always caution investors about buying an annuity because they have been the subject of many controversial financial product sales for many years. Again, you should consider what your needs are and ask yourself if an annuity is best suited to help you achieve whatever it is you are seeking to accomplish? You should also ask yourself if your goals can be achieved with a well managed investment portfolio?
I hope this helps. Please do your research, speak with a few different financial advisors, and try to gain as much objective advice as possible before making a final decision.
Take care and I wish you the best!
It could be a great idea. Annuities are wonderful for funding future recurring expenses like health costs. It doesn't seem to me that you would need that much if all you're funding is the gap between age 62 and Medicare, unless you intend to fund Medicare premiums in perpetuity also.
If you have a qualifying high deductible health plan, now would be a good time for you and your spouse to max out the Health Savings Accounts.
I agree with Adam and Michael, you should not put $70,000 of 401(k) funds into an annuity, no matter the type. The reasons are long and varied. The person who sells the annuity often benefits the most by getting a nifty commission. When you buy an annuity, you are locked in and subject to copious fees, and it's very hard to take your money out without incurring a hefty surrender charge. An annuity's fixed payments lose value over time due to inflation, and when you die the annuity stream halts, unless you purchase an additional "guaranteed period certain" benefit that allows payments to go to a designated beneficiary for that period. Annuity payouts are considered ordinary income, so you take a tax hit there as well, where if you invested the money instead any withdrawals could be organized to be taxed at lower long-term capital gains rates. Overall, you could probably do better with an investment account that is more transparent, more flexible, and less compromised by fees.
Please see my article on variable annuities for more specifics on that product: https://www.investopedia.com/advisor-network/articles/just-say-no-variable-annuities/