Key Takeaways:
- With an annuity, you don’t have the same kind of flexibility as with a 401(k) or IRA held at a brokerage firm.
- Liquidity is limited and early withdrawals can trigger surrender charges.
- Other investments with lower risk can serve a similar purpose of protecting capital.
Question: I’m leaving my job soon and trying to decide what to do with my 401(k). Someone suggested rolling it into an annuity so that I have a steady income once I retire, but I’ve heard mixed things about annuities. Should I consider an annuity, or are there better options for growing my money and creating a reliable retirement income?
Answer: Within the realm of financial planning, annuities are a controversial topic, and there is some validity to both pro and con arguments.
But before looking specifically at the question of whether a retirement saver should consider rolling a 401(k) into an annuity, let’s review what an annuity is.
The Appeal of Guaranteed Income and Safety
Annuities are contracts issued by insurance companies that provide guaranteed income, generally for retirement, through periodic payments that begin at a predetermined time. They can be useful for retirees seeking guaranteed income, longevity protection and peace of mind, especially in a market or economic decline.
But one trade-off for that stability is less growth potential than you’d typically find by investing directly in the stock market.
Skepticism about annuities is well-founded. Annuities have a bad rap for several reasons:
- High fees and commissions. These can erode returns and sometimes aren’t fully disclosed upfront.
- Sales-driven, not needs-based. I’ve seen this one myself on numerous occasions. A new client will come in with a retirement account that has been rolled into an annuity for no apparent reason, leading me to believe that a high commission was the driving force behind the sale. In those cases, the client with the annuity often doesn’t know why this happened – only that some past advisor told them it was necessary.
- Complexity and confusion. There’s no getting around it. Annuities can be hard to understand. Add on some riders, surrender schedules and terms like cap rate and participation rate, and they can become especially murky. Many investors and even some financial advisors struggle to explain them clearly.
- Limited liquidity. Many contracts lock up your money for years and charge a surrender fee if you take an early withdrawal. That’s much more restrictive than if you rolled your 401(k) over to an IRA holding stock and bond exchange-traded funds, which you can sell any time, penalty-free, if you are age 59 1/2 or older.
- Mediocre returns in some cases. Compared to traditional investments, some annuities, particularly fixed and indexed annuities, may offer lower long-term returns.
So those are the negatives; they’re serious and you shouldn’t dismiss them.
However, there are a couple of reasons why, in some cases, having an annuity makes sense. Those are:
- Filling an income gap. An annuity can offer the same type of reliable income as a pension, which fewer and fewer people have these days. If someone is concerned that they might overspend, the regular money doled out from an annuity may help prevent that.
- Minimizing market stress. This is a biggie. More people than you may realize are skittish about the market and don’t want to put their capital at risk. Annuities offer protection from volatility and help reduce the risk of outliving your savings.
Annuity Sales Rising
Market angst may be contributing to the growth in popularity of annuities.
According to insurance industry researcher Limra, total annuity sales in 2024 reached $432.4 billion, a 12% increase year-over-year. Limra says it marked the third consecutive year of record-high sales, despite a drop in the fourth quarter, as low interest rates discouraged some would-be buyers.
Nonetheless, Limra cited the growing demand for protection-oriented products, such as fixed indexed annuities.
So that brings us to the original question: Should you roll your 401(k) into an annuity?
Rolling your 401(k) into an annuity can seem like a smart move at first, especially if you’re worried about stock market volatility reducing your future purchasing power.
But if you dig a little deeper, you can see that keeping your qualified retirement money in an annuity comes with some serious drawbacks that outweigh any benefits. For example:
- No tax advantage. 401(k)s are already tax-deferred. With a traditional 401(k) or IRA, you don’t pay taxes on contributions or growth until you withdraw, just like with most annuities. In addition, distributions from a 401(k) or IRA wrapped into an annuity are still taxed as ordinary income, not capital gains.
- Extra fees. Annuities include administrative costs or rider fees, all without providing any more tax efficiency than you’d get with an IRA held at a brokerage.
If you’re risk-averse or already see that you’ll be scraping by in retirement with what you have, I understand the appeal of an annuity.
You have some alternatives for protecting your money, and they’re all cheaper and less complicated than putting your qualified retirement funds into an annuity. For example:
- High-yield savings account. Offers safety, liquidity and predictable returns with no market risk.
- Certificate of deposit. Not as liquid as a high-yield savings account, but you get a competitive interest rate for locking up your money for a set period that can range from a few months to a few years.
- U.S. Treasury securities. As of April 2025, U.S. Treasuries continue to be regarded as a relatively safe investment, but use some caution here. The traditional view of Treasuries as the ultimate safe-haven investment is facing challenges, and the prices of these bonds have been volatile recently.
- Short-term bond ETFs. Steady income with low sensitivity to interest rates as well as lower volatility than longer-term fixed-income securities.
- Dividend-paying blue-chip stocks. Reliable income with less risk and volatility than growth stocks, such as tech or consumer discretionary stocks.
You Still Need Growth
I want to expand upon that last bullet point. I can’t emphasize this enough: You need some growth assets. Even blue-chip stocks are riskier than bonds, but those aren’t the only type of stocks retirement investors should hold. Long gone are the days when a retiree could depend on a portfolio that generates income but not enough growth to keep up with inflation over the long term.
I’m in no way suggesting that all your retirement assets should be as “safe” as possible. Riskier stocks deserve a place in your investment mix, even if your portfolio is predominantly composed of low-risk vehicles. Don’t guess about this; consult with a financial planner to help you determine the correct allocation for you.
As far as putting your retirement funds into an annuity, just don’t. It’s that easy.
