Many investors and employees are familiar with rolling funds out of a 401(k) into various other financial savings vehicles. However, many people are not familiar with rolling other financial vehicles into a 401(k) - including money from annuities. It can be done, in some circumstances, but investors should be wary of possible adverse consequences as a result of surrendering an annuity contract.
An annuity is an investment or savings vehicles structured to provide an income in exchange for a premium. The income stream can begin either right away or at some point in the future. The buyer generally pays no commissions to buy an annuity. Instead, the insurance company pays the sales commission, and then ensures that it will recoup its investment by charging the annuity owner a fee if he pulls his money out within a certain number of years. Because of this surrender charge period, surrendering annuity accounts can be tricky.
Rollovers into 401k Plans
You can roll balances from tax-deferred retirement plans or qualified pension plans into a 401(k) plan -- provided the gaining plan's rules allow it. Not all 401(k) plans allow you to roll money from other plans into them. Check with your firm's human resources department to get the specific rules for your plans. The IRS allows rollovers from other 401(k) plans, 403(b) plans, traditional, SEP and SIMPLE IRAs, and 457(b) deferred compensation arrangements, but not from Roth IRAs or designated Roth accounts.
Rolling Annuities into a 401(k) Plan
If your plan allows, you can roll an annuity into your 401(k) plan, but only if you held your annuity in an individual retirement arrangement or another 401(k) plan to begin with. This is because 401(k) plan contributions are tax deductible, while annuity contributions outside of a retirement account are not tax deductible. You cannot mix tax deductible with non tax deductible investments in the same account.
If you are unhappy with your current annuity, you can execute a tax-free exchange of one annuity for another under Section 1035 of the Internal Revenue Code. However, this only exempts you from having to pay income and capital gain taxes on the transaction, and it does not exempt you from any surrender charges that may apply. Consult your annuity contract to see exactly what surrender charge penalties you will pay if you surrender your contract.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.