Rolling Over Funds from a 401(k), 403(b), or IRA into an Annuity

Rolling over funds from a 401(k), 403(b), or IRA into an annuity might seem daunting, but understanding the process and its implications can make it easier.

This guide will walk you through the process of both direct and indirect rollovers, explain potential penalties and tax implications, and highlight the benefits of a qualified annuity.

What is a Qualified Annuity?

A qualified annuity is purchased with pre-tax money from a qualified retirement account, such as a 401(k), 403(b), or IRA. Annuities are designed to grow tax-deferred, offer market-protected growth, and provide an optional income stream during retirement. Tax deferral means that you will only pay taxes on the earnings once you start receiving payments, allowing your investment to grow unhindered.

There are two ways to complete your rollover: direct and indirect.

Performing a Direct Rollover

What Is a Direct Rollover?

A direct rollover, also known as a trustee-to-trustee transfer, involves moving funds directly from your retirement account to the annuity provider. This is our preferred method at Revise Annuity. This method ensures that you do not take possession of the funds during the transfer, which can help you avoid tax penalties.

How to Do a Direct Rollover:

While we handle direct rollovers for our clients at Revise Annuity, if you’d like to do it on your own:

1. Setup your target funding vehicle, like an IRA or annuity and keep your account number handy
2. Contact Your Current Plan Administrator: Inform them that you wish to perform a direct rollover.
3. Complete Required Forms: Fill out the necessary forms provided by your current plan administrator or/and the annuity company.
4. Transfer Funds: The funds will be transferred directly from your retirement account to your new annuity account, via check (most common) or direct deposit

What are the tax implications of a direct rollover?

Since you never take possession of the funds, there are no immediate tax consequences. The funds remain tax-deferred, as they were in your original retirement account.

Are there penalties?

There are no penalties associated with a direct rollover if executed correctly.

Performing an Indirect Rollover

What Is an Indirect Rollover?

An indirect rollover involves withdrawing funds from your retirement account and then depositing them into an annuity account yourself. You have 60 days to complete the transfer to avoid penalties and taxes.

How to Do an Indirect Rollover:

1. Setup your target funding vehicle, like an IRA or annuity and keep your account number handy
2. Request a distribution from your current retirement account.
3. The distribution will be sent to you, and you may need to deposit this into your bank account temporarily.
4. Within 60 days, deposit the funds into your new annuity account.

What are the tax implications of an indirect rollover?

If not done within 60 days, the withdrawal is considered a taxable event. Additionally, a mandatory 20% withholding tax typically applies when you take possession of the funds, which you can claim back when filing taxes if you complete the rollover correctly within 60 days.

Are there penalties?

Failure to deposit the full amount within 60 days may result in a 10% early withdrawal penalty if you are under the age of 59½, along with income taxes on the distribution.

Key Considerations

Importance of Timeliness:

For both direct and indirect rollovers, timing is crucial. Ensure you complete the process promptly to avoid unnecessary taxes and penalties.

Save time:

The surrendering party may have a cumbersome process to follow for the release of your funds. Skip email or online chats and pick up to phone to ensure you’ve completed all the necessary steps.

Conclusion

Understanding the direct and indirect rollover processes, along with their tax implications and potential penalties, is crucial. By taking diligent steps and possibly seeking professional support from Revise Annuity (we handle your rollover for free!), you can ensure a smooth transition and capitalize on the benefits of a tax-deferred qualified annuity.