Qualified Roll-Overs and Annuities

There are two main sources of retirement income most people utilize—Social Security and qualified plan funds.  By taking advantage of qualified plans that allow the average American to reduce their pre-tax dollars from their wages, a sizeable income during retirement can be ensured.

Qualified Plans

Long-terms plans, such as a 401(k) and individual retirement account (IRA), or variable accounts like the 403(b) have been very popular for retirement savings.  Although the money is taken out of a paycheck before taxes are determined, taxes must be paid on these amounts when they are withdrawn.  These tax-deferred accounts can draw interest until retirement.  Then, when the funds are withdrawn, taxes are taken out.

Some argue that it makes more sense to pay the taxes ahead of time and not have to worry about paying taxes during retirement.  They also argue that by investing after-taxed money, that less is going to be taxed.  However, for those people who have already been putting money into their 401(k) or IRA for years don’t have the option to go back in time and invest their after-taxed income.  Therefore, some practical advice and strategies pertaining to utilizing annuities as part of a long-term strategic plan for those who have a 401(k) or IRA are necessary.

The Recession

For many workers nearing retirement, horror stories of the recession years have the same theme.  Someone was working at a job and contributing to their 401(k) or IRA.  Then, the recession hit and they were laid off.  If they had been contributing to a 401(k) along with employer contributions, many had a balance well over $100,000.  But, after a few months of no employer match and the stock market losing record points day after day, many saw their balance cut in half!  To add insult to injury, at the same time, many of these people were also being charged management fees.

Qualified Roll-Overs

The best advice to these people would have been to roll-over their qualified funds where they could sustain market losses if they are not being matched by an employer.  A roll-over is a conversion from a qualified plan, such as a 401(k), to a personal Qualified plan, such as an IRA.  Once the rollover into an IRA is complete, the IRA is structured to purchase a fixed index annuity that locks in market gains and eliminates market losses.

This plan works well for people who don’t need income immediately but are no longer receiving employer matches on their contributions.  This allows a person to have more control over their retirement funds and not be subjected to a volatile stock market or high management fees.

Common Questions Regarding Rollovers and IRAs

There are some common questions pertaining to rollovers and IRAs.  They include:

  • What exactly is a rollover?  A rollover is when assets are moved or “rolled over” from an employer-sponsored retirement like a 401(k) into an individual retirement account (IRA).
  • What is the difference between an asset transfer and a rollover?  Depending on where money is held before it’s move to an IRA determines whether it is a rollover or an asset transfer.  An individual can initiate a rollover from a 401(k) or 403(b) when they change jobs or retire.  With asset transfers, a move from a group plan into an IRA offers greater investment flexibility.  If an IRA is at another financial institution, asset transfers can be initiated tax-free in most cases.
  • Can I roll over an employer-sponsored retirement plan assets into an IRA?  Yes.  Almost any type of employer-sponsored retirement plan is eligible for a roll over into an IRA.
  • If I have additional IRA savings outside of an employer-sponsored retirement plan, can they be transferred into an IRA?  Yes.  By completing an asset transfer, any IRA money can be transferred into an IRA.
  • Can I roll over my retirement plan assets into a Roth IRA?  Yes.  A tax-free roll over is eligible from a Roth 401(k) or 403(b) into a Roth IRA.  However, if a person owns a traditional 401(k) or 403(b), then the money that is transferred into a Roth IRA would need to be reported as income and income tax would need to be paid.
  • Am I allowed to make additional contributions to my IRA after my retirement plan assets are rolled over?  Yes.  Although there are annual contribution limits set by the IRS which are currently $5,500 or $6,500 for individuals over 50.  Once the money is added after a rollover IRA is established, it may not be able to be rolled into a future employer’s plan.
  • Can I take money out of my IRA before retirement?  Yes, but withdrawals made before age 59 ½ have some hefty consequences.  There is a 10% penalty tax from the federal government on early withdrawals (before age 59 ½) on earnings for both a Roth IRA and a traditional IRA.  In addition, there is the same penalty for contributions withdrawn from a traditional IRA.  

Variable Annuities

For investors who are looking for additional tax-deferred savings and have contributed the maximum amount to their other accounts, investing in a variable annuity is an option.  Money is typically invested in a mix of stocks, bonds, and money market portfolios.  There are annual costs associated with most variable annuities, but buyers should shop around for the lowest rate.  Assets can be withdrawn at any time and guarantees vary from company to company so be sure to get the advice of a financial advisor or annuity expert before rolling over any retirement assets.

There are many different and sometimes confusing types of options for retirement.  As with any major life decision, discussions of goals, income, and expenses with a highly qualified financial advisor can mean the difference between a retirement that is filled with financial security and one that can lead to the scary thought of running out of money before a person is done with their retirement years.  Taking time to think about retirement income before retirement is one of the most important decisions a person will make.

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