An annuity rollover allows you to transfer money from an existing savings or retirement account into an annuity without incurring immediate taxes or penalties. Moving funds from an individual retirement account (IRA) or 401(k) into an annuity can simplify your accounts, lower fees, and give you access to features that align better with your financial goals.
Read on to learn which annuity rollover rules will affect your annuities.
When you leave a job, you’ll likely need to move your retirement savings into a new retirement vehicle. Some accounts allow you to withdraw the funds as cash, but that can cause you to incur IRS penalties.
To avoid these fees, many people roll their retirement savings — such as 401(k)s, 403(b)s, or IRAs — into annuities. There are two main ways to do this:
By moving your funds from old retirement accounts into annuities, you unlock the following benefits.
Moving your funds into a fixed annuity offers steady, guaranteed payments that may last your entire life, so you can focus on enjoying retirement without worrying about outliving your savings. It’s a simple and reliable way to take control of your financial future.
Tax benefits are a major advantage of annuity rollovers. Your earnings grow tax-deferred, allowing your money to compound (earn interest on interest) because you’re not immediately paying taxes on the growth. And if you wait until retirement to start taking distributions, you may be in a lower tax bracket, so you’ll likely owe less income tax for each annuity payment.
When you set up your annuity contract, you stipulate whether you want to receive monthly, quarterly, or annual withdrawals. This allows you to customize your payments to fit your savings goals. Plus, some annuities include inflation protection, which means your payments can grow over time to help you keep up with rising costs and maintain your purchasing power.
Annuity rollovers have a few drawbacks, but understanding them can help you make smart, confident choices about your financial future.
An insurance company might charge surrender fees if you withdraw money from an annuity before a certain period, usually within the contract's first 5–10 years. Surrender fees work on a sliding scale and decrease over time.
For example, assume fees start at 7% in the first year and decrease by 1% each subsequent year. If you deposit $100,000 and need to withdraw $20,000 in the third year, you'll pay a 5% surrender fee, or $1,000.
With some accounts, you’re allowed to withdraw up to 10% per year before incurring additional charges. This information will be specified in your contract’s terms.
If you're under 59½, the IRS charges a 10% penalty on annuity withdrawals. This rule applies to both qualified and non-qualified annuities, and the penalty comes on top of any regular income taxes you might owe.
Because of the fees mentioned above, if you need a large sum of money quickly, you might pay penalties or additional charges for withdrawing more than the allowed amount. If unexpected expenses arise, this may be a concern, so set up an emergency fund before putting all your savings into an annuity.
Understanding annuity rollover rules helps you maximize your retirement savings and avoid paying unnecessary taxes. Below are a few options for rolling your funds into an annuity.
As long as you transfer the money within the right amount of time, you can convert an IRA to an annuity without paying immediate taxes.
But it’s important to note that the IRS has a 12-month rollover rule in place, which states that you can only transfer your IRA funds into a new savings vehicle once per year. This encourages people to prioritize long-term growth rather than frequently moving funds to chase new investment opportunities.
Transferring your 401(k) into an annuity keeps your funds tax-deferred, so you won’t pay taxes until you withdraw. This method can offer a steady income regardless of market fluctuations, protecting you from depleting your savings.
Before deciding how to transfer your funds, consider which tax implications will apply. Here are the most common rules to consider.
When you do a direct rollover of an annuity, you won’t pay taxes on the rolled-over amount until you withdraw from the new account. Having more funds in your account means you’ll accumulate earnings faster.
In an indirect annuity rollover, you receive a distribution check from your retirement account, but your employer might withhold 20% for taxes.
To avoid taxes and penalties, you must redeposit the entire distribution amount (including the withheld taxes) into a new retirement account within 60 days. If you don’t complete this redeposit in time, the IRS will consider the amount as taxable income. Additionally, you may incur a 10% early withdrawal penalty if you're under age 59½.
Rolling traditional 401(k)s and IRAs into a qualified annuity keeps your tax benefits consistent, as you fund all accounts with pre-tax dollars. Your money will grow tax-free, and you’ll pay taxes on the entire payment amount when you start taking distributions.
If you fund a non-qualified annuity with after-tax dollars from a Roth 401(k) or IRA, your funds will continue to grow tax-free, and you’ll only owe taxes on the earnings once you start taking withdrawals.
Regardless of your account type, during the rollover, you won’t owe any taxes unless you opt for an indirect rollover and fail to redeposit the funds within the time limit.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
