If keeping track of stock movements and interest rates isn't your thing, you might feel inclined to roll your Individual Retirement Account money into an annuity. These insurance plans work similarly to pension plans, and you can often add funds to an existing annuity. However, you need to find out the full details of your contract before making a move since you can't add IRA funds to certain types of annuities.
IRAs and annuities are both tax-deferred investments, which means you don't pay any taxes on your earnings until you actually withdraw money from the account. With both account types, you get hit with a 10 percent tax penalty and ordinary income tax if you withdraw any of your earnings before you reach the age of 59 1/2. Withdrawals are also subject to state income tax. Therefore, you don't lose any tax advantages of an IRA by moving your money into a new or existing annuity.
Qualified Versus Non Qualified
For tax purposes, annuities are designated as either qualified or non-qualified accounts. A qualified annuity holds money that has never been taxed. Since IRAs are funded with pre-tax earnings, you can buy a qualified annuity with IRA money or even with cash from a 401(k) rollover. Non-qualified annuities contain funds that have already been taxed — such as the cash you hold in your savings account. You can't roll IRA money into a non-qualified annuity, because if you did, you'd be mixing pre-tax and after-tax funds.
Deferred Versus Immediate Annuities
Annuities fall into two broad categories: immediate and deferred contracts. When you buy an immediate annuity, you hand over a lump sum of cash and the insurance company turns your money into an income stream that lasts either for a set number of years or for the rest of your life. Immediate annuities are one-stop shops meaning you can't add additional funds to an existing account. Deferred annuities are contracts that grow for a certain number of years before eventually being turned into an income stream. Some insurance firms allow you to roll additional funds into an existing deferred qualified annuity contract. Rules vary between firms, but some companies allow you to add money at any time while others only allow you to do so once a year.
Deferred annuity contracts include an accumulation phase during which the insurance firm invests your money in mutual funds and other types of accounts. You have to pay hefty surrender penalties to the insurance firm if you withdraw money or even roll it into another type of account before the accumulation period ends. Contracts vary, but an accumulation phase can last for two decades or more and penalty fees often top 8 percent. You don't incur these types of fees when you move IRA funds between other types of IRA accounts containing stocks, bonds or mutual funds. If you roll your IRA money into an annuity, you are in it for the long haul.