You can shift funds from an IRA to an annuity at any time, but there are two times in particular when you should seriously consider it. The first is after a big gain in your individual retirement account. Moving funds to certain annuities locks in those gains. And after retirement, when you’re no longer earning money to contribute to your IRA, it’s a good idea to consider moving your retirement savings into annuities that aren't at risk of market fluctuations. Until you need to convert it to income, your account’s value will continue to grow. On the other hand, you shouldn’t lock in an annuity if you might need access to your money, such as being between jobs or moving.
Annuities offer peace of mind during economic volatility, as opposed to IRAs, whose investments are vulnerable to market changes. Fixed annuities continue to grow in value in all markets. And although equity-indexed annuities don’t gain if their underlying index falls, they don’t lose value regardless of market conditions. Variable annuities, on the other hand, are invested directly in the market. Although their potential for rapid growth is unmatched by other annuities, they can lose value in a falling market. Your risk tolerance will help determine which type(s) to purchase, and what percentage of your total retirement savings you dedicate to them.
The feature that makes annuities different than other financial products is that they can be converted, or annuitized, into a guaranteed income for life. You can outlive an IRA, but not such an annuity. You can also configure your annuity to guarantee that if you die before the full amount of the annuity is paid out, the payments will continue to your beneficiary. There’s no waiting period for annuitization, either – an annuity can be converted to income on the day of purchase, or a month later, or years later.
Surrender Charges and Fees
A drawback of annuity ownership is that your access to your own money can be significantly restricted, especially during the first few years. Withdrawal of funds beyond a basic level, usually 10 percent, is subject to insurance company penalties that decline annually and eventually disappear. These surrender charges are in addition to applicable IRS penalties for early withdrawals. In addition, some annuities have multiple fees that can eat away at your account’s value. This makes your due diligence responsibility even more important. IRAs also charge early withdrawal and other fees, but they’re usually nowhere near as steep as annuities’ surrender charges.
Irrevocability of Annuitization
Although annuitization guarantees that you cannot outlive an annuity, it carries the disadvantage of irrevocability. Until annuitization, you own the annuity’s entire value. Subject to IRS and insurance company penalties, you can access part or all of it. But once you convert it to income, you give up ownership of the account balance, and you no longer can withdraw from it. So although annuities have a place in retirement portfolios, prudence dictates that you also establish and maintain a separate fund, easily accessible, to cover emergencies.
If you decide to shift funds from your IRA to an annuity, shop around for one that best meets your requirements. If you already own an annuity, don’t consider yourself locked into that type, or locked into that insurance company, for future purchases. In addition, to avoid tax problems, the transaction should be conducted as a trustee-to-trustee transfer.
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