By Jim Calaman
Is an index annuity good for a 401K rollover? Absolutely, it is one of your best options. It is very easy to do a direct transfer from the 401k custodian. It takes about 10-15 days and there are no income tax ramifications. Most 401k programs invest in mutual funds. Most of these funds are invested in the stock market and that means these funds are at risk for declines in the market. Recently, the markets have improved but in 5 years before that, 401k investors lost almost 50% of their assets. To recover from a 50% loss, the market must go up 100% just to get back even.
401k programs are very popular but most investors are not aware of the charges in their 401k. There are management fees and commission charges for buying and selling the stocks. This can ad up to 2% a year but these charges are not visible in your 401k statements. Index annuities have no yearly charges and there are no losses when the market declines.
The only fees are surrender charges for removing funds before the surrender period is over. Most surrender periods are 5-7 years and most annuities allow 10% annual withdrawals without any penalty. However, like a 401k, if funds are removed before age 59 1/2, a 10% penalty is imposed by the Internal Revenue Service. There are hardship exceptions to this rule and sometimes the money can be removed without incurring the IRS penalty.
Some annuities have an index where an investor can actually make money if the market declines. Each year on the contract anniversary, the owner has the option to reallocate the annuity funds between different indexes such as the S&P 500, Dow Jones, NASDAQ 100 and the Russell. Reallocation can be done up to 30 days after the contract anniversary.
Another advantage of rolling a 401k to an index annuity is the lifetime income benefit. This is a new rider that has been added to annuities and it can make a huge difference in the amount of money available for retirement income. This benefit can be activated without annuitizing the contract so it offers additional flexibility in retirement planning. Most annuities guarantee a 5% growth rate on the income account.
When an annuity is issued, an income account value is set up to serve as the basis for determining the amount of income available to make lifetime income withdrawals. The income account value is not available to be taken as a lump sum but only to determine the amount that can be taken as lifetime income payments. The accumulation period usually lasts anywhere from five to seven years and can be renewed if the retiree is not ready to begin payments. The longer the accumulation period, the larger the lifetime payments will be.
Annuities also offer a medical benefit. If the annuitant is confined to a nursing home, hospital, or hospice facility the payout benefit is usually doubled. Also, some companies offer health solutions from the Mayo Clinic to help the annuitant live longer and feel better. Some annuities now offer long term care benefits for an additional annual charge.
So to summarize, an index annuity is an excellent option for a 401k rollover. By generating stock market like returns with no risk, an annuity program can still generate a good return with no risk and the fees are much lower.
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