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Benefits to annuitizing 401k money?
Old 02-04-2018, 07:13 AM   #1
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Benefits to annuitizing 401k money?

Are there any tax benefits to annuitizing money held in a 401k? I did Google the topic, but, frankly, did not understand it. Naturally, I would never take such a step without an undersanding and if that requires a fee only financial advisor, then so be it. But, can anyone in plain simple Englsih explain? Thanks very much.
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Old 02-04-2018, 07:30 AM   #2
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Originally Posted by LXEX55 View Post
Are there any tax benefits to annuitizing money held in a 401k? I did Google the topic, but, frankly, did not understand it. Naturally, I would never take such a step without an undersanding and if that requires a fee only financial advisor, then so be it. But, can anyone in plain simple Englsih explain? Thanks very much.
Placing an annuity in a tax sheltered account does not double the advantages of tax free compounding. Annuities usually end up in a tax sheltered account because it enriches an adviser to sell annuities to anyone that will bite.

Just my 2 cents worth,

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Old 02-04-2018, 07:43 AM   #3
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Don't think of this as an all or nothing decision. Consider annuitizing a part of the money to cover expenses that must be met every year no matter the market (i.e. taxes, insurance). There are calculators to figure the amount needed to meet payment obligations. If all of the money was pretax then all of the future annuity payments will be taxable. Check out low cost sources for annuity contracts.
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Old 02-04-2018, 08:12 AM   #4
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If you have multiple IRA/401k where some are annualized, understand how RMDs work.

If you are seriously considering this, shop the annuities.
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Old 02-04-2018, 10:04 AM   #5
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Also, consider limiting annuity to things immune to inflation (ie; mortgage or similar fixed debt / payment).

I am a recipient of a $7,000 annuity like "buyout" that initiated in 1992. Today, that same buying power would require over $12,000. And that only took average inflation rate of ~2.5%. This buyout expires in 2021. I've had a very lucky run. It also taught me to be leery of annuities in any form.

A 5 or 10 year span of higher interest would just crater the buying power of an annuity. There a plenty of inflation calculators on-line. You should model multiple scenarios. In example 1960-1990, inflation was 5%. Yikes!!
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Old 02-04-2018, 10:35 AM   #6
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Kitces's article discusses using a qualified deferred annuity (i.e. "longevity" annuity) inside a 401 but notes that it's not very appealing as a way to avoid RMDs since you'd be better off just taking the money out at 70.5 and paying the taxes. It does work to insure against a looongg life, but not as well as stocks. You're limited to 1/4 of the 401k value and no more than 125k.

https://www.kitces.com/blog/why-a-ql...md-obligation/
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Old 02-04-2018, 02:34 PM   #7
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Kitces's article discusses using a qualified deferred annuity (i.e. "longevity" annuity) inside a 401 but notes that it's not very appealing as a way to avoid RMDs since you'd be better off just taking the money out at 70.5 and paying the taxes. It does work to insure against a looongg life, but not as well as stocks. You're limited to 1/4 of the 401k value and no more than 125k.

https://www.kitces.com/blog/why-a-ql...md-obligation/
Better known as a QLAC, it is limited but can allow up to 125K to be excluded from RMDs as a deferred annuity that starts at a later date. You don't have to include the QLAC amount in your RMD at 70 1/2.
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