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401K Rollover to an Annuity

Stan Haithcock
June 2, 2024
401K Rollover to an Annuity

Hi there, Stan The Annuity Man, America's annuity agent licensed in all 50 states, including that beautiful one you're sitting in right now. Thanks for reading along. What we're talking about today is 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? Let's get into it.

As you know, we live in a pension-less world pension, meaning that you don't have one unless you work for a government or a good trade union that sets one up for you. You're going to 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? Can you start planning for future income 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 in life is to try to take all your 401k assets and jam them into an annuity. It's a horrific business practice.

Do You Need an Annuity?

You don't always have to go from 401k to an annuity period. You might not need an annuity, so 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. If you don't need to solve for one of those four issues, problems, goals, then you don't need an annuity. Annuities should never, in my opinion, be purchased for market growth.

Too Much Money

The 401k is for market growth. That's what those mutual funds and all those things inside of that you've been choosing. That's market growth. And if you want market growth and 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 what you should look at when you're thinking, this guy's trying to pitch me, or this lady's trying to pitch me rolling my 401k into an annuity, is that 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't put all of their 401k into an annuity. Please." The annuity gods are wrong. In fact, the annuity industry kind of frowns upon you putting too much money in. Some say it's 50%, some say it's 60%. The annuity industry starts to notice if you're putting way too much money into an annuity, and if they're looking through the application that you fill out and they 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.

Bad Chicken Dinner Seminars

The other thing you must be careful of is the bad chicken dinner or a very expensive steak dinner seminars for the 401k people who are preparing to retire or thinking about retirement. They're typically pitching you an Index Annuity that is pitched as a one-size-fits-all solution for all problems. Index Annuities are CD products. There's 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 at 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 nice people with 401 Ks, and it's going to be a 15 or 25% bonus."

‌There are a hundred pennies in the 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." No, that's like if you're buying an annuity for the bonus; it's like buying a car for the stereo system. It makes no sense.

Too Good to Be True

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? Please 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 and 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 receives the continued income uninterrupted and unchanged for their life, and you can structure it so that 100% of any unused money goes to the listed beneficiaries. The evil annuity company doesn't keep a penny. What I'm going to warn you about right here is trying to buy the one-size-fits-all all product. Purchasing the two good to be true product and 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 it 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, regardless of type, are like a gallon of milk every seven to 10 days they expire, and you need to re-quote them. The only way to lock them in is through the application process.

No, that's not a sales pitch. That's just a fact. So, should you roll your 401k to an annuity, maybe, 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, maybe that makes sense for you to roll part of your 401k into an annuity. Now, the only way that if you wanted to roll all of your 401 Ks because there are probably people out there that 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. It might make sense to look at all those assets 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, and I'm very adamant about it: you shouldn't put all your eggs in one basket.

You just shouldn't put everything in there, and you really 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 appropriately allocated. That's the reason that you and I have to talk.

Let's talk about 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. The transfer from the IRA to the annuity is also a non-taxable event that triggers no taxes, so just understand that many people think when they move money, it triggers, but it does not. My team will handle all of that for you, but the initial step is to move from a 401k to an IRA and then from the IRA to an annuity.

Hey, one last thing. From an administrative standpoint, when you roll the 401k to an IRA, then the IRA is 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, so an IRA will be established for you at the annuity company that we choose based on running all those quotes.

Do me a favor and go to The Annuity Man. I encourage you to get my books. There are six annuity owner's manuals that are all short, like 60 pages that I've written, just the nuts and bolts, the facts, the good, the bad, the limitations, the benefits. You can download them for free and under no obligation. You can also run quotes using our calculators, some of the best calculators on the planet. No one's going to call you or show up at your doorstep. If you want to engage and have a conversation, please book a call with us. We'll have a 30-minute talk, dig into your situation, and we'll put together a customized quote for you. I appreciate you joining me on this 401k to annuity discussion, and I'll see you on the following Stan The Annuity Man blog.

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.

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