How to Convert a 401(k) to Annuities

You can convert your 401(k) to an annuity in a variety of ways.

You can convert your 401(k) to an annuity in a variety of ways.

About 11 percent of employee 401(k) plans give participants the opportunity to buy annuities with their 401(k) funds, according to a 2012 retirement report by Aon Hewitt. Participants can also take their 401(k) balance and buy an annuity when they retire or leave their company. There's also a little known and less costly option allowing you to convert your 401(k) into an annuity within your own company.

Defining Contributions

Defined contribution plans -- including 401(k) plans -- give you the opportunity to define how much you want to contribute into a retirement plan. The performance of your investment options determines the value of your plan when you retire. You can choose different ways to distribute your funds -- either in a lump sum or in a series of withdrawals -- penalty-free after the age of 59 1/2. Also, you can simply rollover part or all of your funds into an individual retirement account, and buy an annuity after you retire. You won't pay taxes until you take income payments. Then the Internal Revenue Service taxes the distributions as ordinary income.

Defining Benefits

Defined benefit plans -- such as pension plans and annuities -- provide you a defined, ongoing income payment for each month after you retire. Unlike defined contribution plans, these plans aren't based on the performance of investment options tied to the stock market, but the plans can be hard to understand due to the calculations that determine the eventual income payment. Also, some employers shy away from defined benefit plans because the company takes on the risk of investing the funds and paying the guaranteed defined benefit.

Gaining Ground

The IRS revenue ruling 2012-4 has helped to build momentum for in-company conversions from defined contribution plans, such as 401(k)s, to defined benefit plans. The ruling cleared up some of the misunderstandings and fears employers had about an annuity conversion, helping employers provide employees with the security and guarantees of annuity payments. Only 6 percent of employers offered such as conversion plan in 2012, but another 4 percent stated they might do so during 2012 or 2013, according to the Hewitt report.

Ask for the Option

Employees can influence their employers to offer the rollover option by asking for it. Many employers want to attract the top talent and seek ways to differentiate themselves from other companies, and others want to reward their employees with more retirement planning options. Even if your company doesn't offer this company-based rollover, you can rollover your funds and buy an annuity with some or all of your retirement funds. This guarantees you a consistent retirement income -- free from the whims of the market -- during your retirement years.


About the Author

Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.

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