What if I have an annuity in my 401(k)?

An annuity is a long-term insurance product that provides guaranteed income. They are common in 403(b) accounts (but also found in some 401k and other types of retirement accounts), and they provide a steady stream of payments at regular intervals based on the terms of the annuity. In general, there are two stages in the life of an annuity:

• In the accumulation phase, you pay premiums into the annuity. You can do this either with a lump sum or over a specific period of time, depending on the type of annuity.
• During the distribution phase, you’ll receive monthly, quarterly or annual payments according to the terms of the annuity contract.

Annuities in your retirement account that are in the accumulation phase can be rolled over to a new retirement plan or an IRA. 

As you rollover your old account with an annuity to a new employer plan or an IRA, you have a few options:

1

Rollover the funds in your annuity to the new destination account

In most cases your annuity has to be liquidated and the funds will be rolled over to your destination account. Manifest will help you with all the paperwork required to achieve this. There are a few things to consider that are mentioned below if you pick this option.

What should I consider when rolling over my Annuity?

There are three things you have to consider before rolling over your Annuity:

 

First, you should be aware that certain annuity plans charge participants a fee for removing funds from the annuity early. This penalty, known as a surrender charge, is specific to each plan. (Please scroll all the way down to read more about surrender charges, and make sure to check your annuity contract to determine the charge). If the surrender charges are high but will be lower in a few years, it may be best to wait a few years before rolling over your annuity to a different account.

Second, rolling over an annuity from a retirement account to another retirement account is tax-exempt. So when we initiate a direct rollover from your old plan to a new plan or IRA there should not be any tax implications.

Third, when we initiate a direct rollover liquidation normally takes place as part of the rollover process. Your funds (minus the surrender charge) will be moved over to your destination, and you can decide to allocate them based on your destination plan menu and personal preferences.

What is a surrender charge?

Annuities usually have a surrender period. The majority of annuity contracts contain language permitting insurance companies to keep a percentage of your account value if you close your account before a specific number of years have passed. These surrender charges commonly range from 7 percent to 10 percent and decrease by 1 percent annually until finally disappearing entirely. Executing a rollover during this period will result in a reduction of the amount transferred by the surrender charge percentage.

Example: Surrender charge periods vary in length and typically decrease the fee charged during the period. 

• Year 1 – 6%
• Year 2 – 5%
• Year 3 – 4%
• Year 4 – 3%
• Year 5 – 2%
• Year 6 – 1%
• Year 7 – No charge

if $10,000 was withdrawn in the second year the surrender charge would be $500 ($10,000 X 5 percent). This is just an example. The number of years and the percentages will vary depending on the type and terms of the annuity involved.

2

Only rollover the non-annuity balance

With this option, your annuity will remain in your old account and will continue to follow the annuity contract. You can choose to rollover the annuity at a later date when your surrender charges are lower. The downside to this option is that you will continue to maintain your old account.