Friday, February 27, 2009

Should I Roll my 401k into an Annuity

Like almost all investment answers, it depends on your situation. First, a bit of background: When you rollover your 401(k) you are actually converting it to an Investment Retirement Account (IRA). An annuity is a type of insurance that can be held in an IRA. It combines investments with various guarantees, or insurance. There are two main types of annuities. A fixed annuity offers a fixed rate of return for a predetermined period of time. A variable annuity invests in stock and bond funds and will rise and fall in value with the underlying investments chosen.

In my opinion, it is usually not a good idea to put an annuity in your IRA. Since one of the main advantages of an annuity is tax-deferred income, it makes little sense to hold one in your IRA, which is already tax-deferred. However, there are exceptions where an annuity might sense for you:

  • If you are retired, or close to retiring, an annuity can provide an income stream you can't outlive. The annuity will essentially create a personal pension for you by providing monthly income for life.
  • Fixed annuities may provide a higher interest rate than a CD. So if you are considering a CD for your IRA, you might compare rates with a fixed annuity.
  • Variable annuities often provide insurance known as a “death benefit”. So, if the annuity value goes down, the insurance kicks in to preserve the original amount invested. That is an advantage for your beneficiaries that no stock or mutual fund can provide, though it does come at a cost.

Annuities are usually more expensive than other investments and often have surrender charges so they may not be the best choice for every investor. Before you invest in anything it makes sense to analyze the features, costs, and what's right for your particular situation, with your investment adviser.