Today, we're talking about rolling your 401K into an annuity. Should you do that? Could you do that? Why should you do that? Somebody's trying to make you do that. What's the answer Stan The Annuity Man? I'm going to give you those in today's blog.
As you know, we live in a pension less world. Pension less means that you don't have one unless you work for the government or a good trade union that set one up for you. You'll have to figure out what to do with your 401K assets, a defined contribution plan is really what that is. What do you do with that at the end of the work cycle? Or if they allow you to take money out while you're working like a partial distribution from that, can you start planning for income in the future or principal protection? Should you take your 401K assets and roll them into an annuity? There are people in the annuity business whose whole focus is to try to take all your 401k assets and jam them into an annuity. That's horrific, and it's a horrific business practice. You don't always have to go from 401K to an annuity period, and you might not need an annuity.
Let's start there. Do you even need one? Here's the way to find out. You ask yourself two questions and answer them. Number one, what do you want the money to contractually do? And number two, when do you want those contractual guarantees to start? From those two answers, I can tell you if you don't need an annuity or if you do, which one will provide the highest contractual guarantee. The other thing I use is an acronym called PILL. P stands for Principal protection. I stands for income for Life. L stands for Legacy, and the other L stands for Long-term care and confinement care. You don't need an annuity if you don't need to solve one of those four issues, problems, or goals. Annuities should never, in my opinion, be purchased for market growth. The 401k's for market growth. That's what those mutual funds and all those things inside of that you've been choosing, that's market growth. If you want market growth, you don't need to roll your 401K to an annuity, you need to roll it to an IRA non-taxable event and then manage your money like you've been managing it. Or have someone manage it for you. But that's what you should look at when you think this guy's trying to pitch me or this lady's trying to pitch me rolling my 401k into an annuity. You need to figure out what the goal is. Is it income, or is it principal protection? What are you trying to solve for, and if it's income, is there a specific amount you need to solve for? One of the big issues with people rolling their 401K to an annuity is that, in many cases, the recommendation is putting too much of your money into the annuity.
I know what you're saying, "Wait a minute Stan The Annuity Man. Don't you sell them?" Yes, I sell them. I sell more than anybody. "Well, then, why are you saying that?" Because it's true, and I know the annuity gods are like Stan, please stop saying that people can put all their 401k into an annuity. Please. The annuity gods are wrong. In fact, the annuity industry frowns upon you putting too much money in. Some say it's 50%, and some say it's 60%. If they're looking through the application you fill out and determine that you're putting too much money into the annuity, they will deny the application. The annuity industry is very conscious of that. They do not want all of your eggs in one annuity basket, as they say, even though the agent might want that to happen.
The other thing you must be careful for is the bad chicken dinners or the very expensive steak dinner seminars for the 401k people who are getting ready to retire, thinking about retirement, and thinking, what do we do with our 401k? They're pitching you an Index Annuity that is typically pitched as a one size fits all, solves all problems, everything. Index Annuities are CD products. Nothing wrong with them, but they're not market products, and they're not too good to be true, and never, ever, ever, ever roll your 401K to an annuity for an upfront bonus. Upfront bonuses are candy for the stupid, and you're not stupid. There's not a philanthropist, an annuity company that goes, you know what? I'm going to give money away, and I'm going to give money away to all the lovely people with 401ks, and it's going to be a 15 or 25% bonus. There are a hundred pennies in a dollar. Please don't be that stupid to buy it for that. It's like going to a car dealership and going yeah, I like the engine in that car, and I like the wheels, but I'm going to buy that car for the stereo system. It makes no sense.
When you're looking at your 401k and rolling it to that IRA, you're saying, okay, what do I need to do? Once again, the two questions. What do you want the money to contractually do, and when do you want those contractual guarantees to start? Put it in the back of your head that annuities are the only product type/strategy that provides a lifetime income stream as long as you are breathing. With your 401K asset rolled into an IRA, you can attach your spouse for lifetime income so that both of you get a lifetime income. So, if you die in that Lamborghini crash or the Bentley crash, then your spouse gets the continued income uninterrupted and unchanged for their life. You can structure it so that 100% of unused money goes to the listed beneficiaries, and the evil annuity company doesn't keep a penny.
I'm going to warn you about trying to buy the one size fits all product right here and buying the too- good-to-be-true product, buying a product that someone just showed you one company or one specific product from that company. Remember, annuities are commodity products. I know the industry hates when I say that, but it's true. You shop all carriers for the highest contractual guarantee for your specific situation and understand that annuity quotes are like a gallon of milk, regardless of type. Every seven to 10 days, they expire, and you need to requote them, and the only way to lock them in is through the application process. No, that's not a sales pitch, and that's just a fact.
Should you roll your 401K to an annuity? Maybe or maybe not. The maybe is if it's trying to solve for the four things; Principal protection, Income for life, Legacy, or Long-term care. If you want to solve for any of that, then maybe that makes sense for you to roll part of your 401k into an annuity.
Now, the only way is if you wanted to roll all of your 401ks because people probably say, "Well, Stan, I've got extra money on the side, and this 401k represents a small part of what I have." At that point, that might make sense to look at all of that asset for an annuity, but if the 401K is primarily all you have, you can't take it all and slam it into an annuity.
To reiterate one point I just mentioned about rolling 401k assets into an annuity, I'm very adamant that you shouldn't put all your eggs in one basket. You shouldn't put everything in there; you just can't. You can't even think like that. If someone's trying to pitch that to you, it just doesn't make sense. It has to be in proportion and allocated properly. That's the reason that you and I have to talk.
Let's discuss some of the nuts and bolts of rolling a 401K into an annuity. First, if we have that conversation and it makes sense for us to start looking at that, the 401k should be rolled into an IRA first. That's a non-taxable event. It goes from the 401k to the IRA, and then if you say well, let's decide on an annuity strategy, and we do, and it's appropriate, then the transfer from the IRA to the annuity is also a non-taxable event that triggers no taxes. So, understand that many people think when they move money, it triggers tax. It does not. My team will handle all of that for you, but the initial step is to move it from 401K to an IRA and then from the IRA to an annuity. Also, from an administrative standpoint, when you roll the 401k to an IRA, then the IRA, when it's transferred to the annuity, there's an IRA established at the annuity company. So, it's going from IRA to IRA. Once again, a non-taxable event, doesn't trigger any taxes, and there'll be an IRA established for you at the annuity company that we choose based on running all those quotes.
Lastly, I appreciate you joining me on this 401K to annuity discussion. I encourage you to run quotes on our annuity calculators, some of the best calculators on the planet. 24/7, 365 access. No one's going to call you or show up at your doorstep. But if you do want to engage and have a conversation, please hit the book a call link. Most of the time, you'll get me, and we'll have a 30-minute conversation. We're going to dig into your situation, and we'll put together a customized quote for you.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.