401K Annuity: How It Fits With Your Retirement Plans
There are many common misconceptions about the relationship between Annuities and 401ks. Make sure you know enough to decide how to create your perfect lifetime income stream.
Is an annuity better than a 401K?
No, because they're not the same. A 401K plan is a defined contribution that you use with your employer. Sometimes they match a certain percentage of the money that you put in. A 401K is a tax-deferred structure to grow your money as you're working and annuities are a transfer of risk contract that most people look at as a lifetime guaranteed income stream. If you're out there yelling, “I hate all annuities." You already own one and it's called Social Security which is the best inflation annuity on the planet.
If you're looking for lifetime income, annuities are better than 401Ks. If you're looking to grow your money, then 401Ks are better than annuities.
Annuities should never be purchased for market type growth, and 401Ks are for market growth. You're working, you're trying to grow your money so that when you retire, you can convert that into a lifetime income stream, or you can continue to manage that money for growth.
You're talking about true apples and oranges here. The apple is an annuity that you can use primarily for principal protection or lifetime income. The orange is 401K, which is primarily used for tax-deferred market-type growth. Always buy an annuity for the contractual guarantee, not what it might do.
Can an annuity be rolled over to a 401k?
The answer is no, but a 401k can be rolled over into an annuity. 401k's are defined contribution plans that are intended for tax-deferred growth. It is a structure that is recognized by the IRS where you can, while you're working, choose the mutual funds or ETFs, etc. with your specific 401k plan to grow those assets.
At the point of retirement, most people consider placing their 401k into an annuity for a lifetime income. Whether the income starts now or down the road, it's your decision and it's customizable, but annuities cannot be rolled over into a 401k.
So can a 401k be rolled over into an annuity? The answer is yes, but what do you want the money to contractually do and when do you want those contractual guarantees to happen? If you answer, I want market growth, then you should never buy an annuity. End of story. Annuities were put on the planet as contractually guaranteed transfer risk products, not market growth products.
What are the disadvantages of an annuity?
Every single type of annuity out there has propositions and limitations.
Every single type of annuity out there has propositions and limitations. Anytime anyone says “all annuities”, they have no clue what they're talking about because they don't understand that there are numerous types of annuities.
Single premium, immediate annuities, deferred income annuities, and qualified annuity contracts are lifetime income products. With these types of products, income flows. So the disadvantage to those would be liquidity and control of your money.
What you need to pay attention to are the pros and cons. Fixed index annuities for example are the go, go product that everyone thinks is too good to be true. These are CD products, but they're pitched as market growth products. They're not, and that's the disadvantage.
The issue with a lot of annuities is the sales pitches behind them. The risks of the annuity should be laid out to you during the sales process all while you're looking into what purchasing an annuity does.
If it sounds too good to be true, it is every single time. Never buy a fixed annuity for the hypothetical, theoretical, scenarios. Buy the contractual guarantees so you will understand the limitations, the disadvantages, and the benefits of the specific annuity type that you are considering.
How does a group annuity work?
Group annuities are usually self-explanatory. A carrier will offer an annuity guarantee for a specific group which could be what's called a guaranteed investment contract (GIC). A GIC is a fixed rate product that functions as a CD and acts as a multi-year guarantee annuity where it has a specific interest rate.
There are also group annuity contracts for a lifetime income. In truth, there are not too many group annuities out there anymore but if your company offers one certainly contact us at theannuityman.com and we can walk you through what that specific offer is. Depending on the group annuity, we can tell you if it's a good deal or not. Just based upon my 30 plus years in the business.
Just remember annuities, group or not, are transfer risk products and you should base your decision on the contractual guarantees being offered. If you are still curious about how this affects you personally, book a call.