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Can an Annuity Be Rolled Over to a 401(k)?

By Motley Fool Staff – Mar 20, 2016 at 3:20PM

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Only certain circumstances allow rollovers. Find out what they are.

Tax-deferred investments can be useful for saving for long-term financial goals like retirement. Both tax-deferred annuities and 401(k) plans offer many advantages for retirement savers, but one question that often comes up is whether someone can roll over an annuity they purchased into their 401(k) plan. The answer depends on how you own the annuity and whether your 401(k) plan will accept it as a rollover asset.

Annuities vs. 401(k) plans
Even though annuities and 401(k) plans both have tax advantages, they aren't identical. Annuities are tax-deferred, but you don't get an up-front deduction on your taxes for the money you contribute to an annuity. By contrast, 401(k) plans typically allow participants to exclude contributed money from their taxable income, producing substantial tax savings.

There are two ways you can own an annuity. Many investors own annuities in regular taxable accounts, and that allows them to take full advantage of the tax-deferred provisions of the annuity. However, it's also permissible to buy an annuity within an IRA or other tax-favored account. The fact that the IRA is tax-deferred and the annuity is tax-deferred builds in unnecessary redundancy in tax advantages, but it can make sense from a planning perspective in producing income for future withdrawal.

What can you roll over?
If you own an annuity in a regular taxable account, then there's no way to roll it over into a 401(k) plan. Commingling qualified plan money with annuity assets that weren't initially treated as qualified plan money would pose problems.

With an annuity that you hold within an IRA, however, rollovers are a possibility. The 401(k) plan must have provisions that allow acceptance of the annuity, and the annuity provider must allow the plan to take ownership of the annuity policy.

If either of these conditions isn't met, then you might be able to achieve a similar result. Tax-free 1035 annuity exchanges can allow you to move money from one annuity to another without tax consequences, and so if your employer can't hold certain annuities but can hold others, then you can switch to an acceptable annuity for the 401(k) plan.

The primary takeaway here is that rollovers from annuities to 401(k) plans aren't automatically possible. Even though many annuity salespeople play up the fact that annuities offer many of the same tax advantages as 401(k) plans, the way in which the tax laws treat them is different depending on the situation. Therefore, it's important to understand when you buy an annuity what your particular options will be with it.

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