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Converting part of 401k to immediate annuity?
Old 07-09-2012, 09:52 AM   #1
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Converting part of 401k to immediate annuity?

upon retirement. Anyone know about the tax ramifications? I thought I read I am not tax upon withdrawing the lump sum if it goes into an annuity. Did I read it right?
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Old 07-09-2012, 10:34 AM   #2
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There are none at the time of annuity purchase. If you purchase an annuity (e.g. SPIA) with tax deferred funds (401(k) or TIRA), your payments become taxable in the year you receive income from the SPIA.

It's the same as if you purchase an SPIA with a lump sum pension payout.
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Old 07-09-2012, 11:19 AM   #3
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You don't need to buy the annuity inside the 401k account? Or is there a special IRA annuity? Just withdraw from a 401k and buy any old annuity?
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Old 07-09-2012, 11:25 AM   #4
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You don't need to buy the annuity inside the 401k account? Or is there a special IRA annuity? Just withdraw from a 401k and buy any old annuity?
At retirement, a lot of folks perform a rollover IRA (a TIRA, with the rollover name for tracking purposes - held separately from any other TIRA) and purchase an SPIA from that source.

Or at least, that's what I did ...
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Old 07-09-2012, 01:54 PM   #5
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Generally the insurance company that you are buying the annuity from will create a transfer IRA annuity account for you that you can transfer/rollover your IRA/401K funds to. Then they will take the money out of the IRA annuity fund to purchase the annuity. Just need to be clear if the funds being transferred are qualified or not.
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Old 07-09-2012, 02:09 PM   #6
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Originally Posted by Dino1 View Post
upon retirement. Anyone know about the tax ramifications? I thought I read I am not tax upon withdrawing the lump sum if it goes into an annuity. Did I read it right?
As others have indicated, in order to have the transactions not be construed as a taxable withdrawal from your 401k you need to 1) rollover the 401k monies to a IRA and 2) have the IRA buy/own the immediate annuity.

Then the immediate annuity payments made to you are taxable the same as if you withdraw monies from the IRA.
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Old 07-09-2012, 02:09 PM   #7
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Originally Posted by zinger1457 View Post
Generally the insurance company that you are buying the annuity from will create a transfer IRA annuity account for you that you can transfer/rollover your IRA/401K funds to. Then they will take the money out of the IRA annuity fund to purchase the annuity. Just need to be clear if the funds being transferred are qualified or not.
+1

When I FIRE'd, I moved the lump sum of my pension and the 401K balances into an existing IRA. The from that IRA, used a portion of that or the annuity. An important point is to make sure the check (if the 401K only does the payments this way) is made payable to your IRA and not to you directly.
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Old 07-09-2012, 03:53 PM   #8
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Then All the monthly payments to you from the annuity are taxable at the normal rate, yes? Assuming you are over 59 1/2. One question is are the taxes due to the USA? Even if you live outside the USA taking distributions?

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Old 07-09-2012, 04:17 PM   #9
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Then All the monthly payments to you from the annuity are taxable at the normal rate, yes? Assuming you are over 59 1/2. One question is are the taxes due to the USA? Even if you live outside the USA taking distributions?

SWR

The tax rules are complicated for US citizen living outside the country. But in general Uncle Sam taxes you no matter where you live. You may (or may not) get credit for tax paid to the host country. My guess is in most cases for annuity payment from an IRA/401 you won't owe any taxes to the host country but would owe them to Uncle Sam.
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Old 07-10-2012, 07:05 AM   #10
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The tax rules are complicated for US citizen living outside the country. But in general Uncle Sam taxes you no matter where you live. You may (or may not) get credit for tax paid to the host country. My guess is in most cases for annuity payment from an IRA/401 you won't owe any taxes to the host country but would owe them to Uncle Sam.
How a US expat will be taxed depends on tax treaties and where the expat lives.

Because the US taxes on residency and citizenship and has a Saving Clause in all it's treaties a US citizen expat will have to pay US tax on any income from an annuity. If the payment is paid outside the US you cannot choose no withholding and your annuity provider must withhold tax according to the information you submit on W-4P. You will probably get a tax credit for US tax paid in your residence country.

Other rules apply for non-periodic payments from things like 401ks, IRAs and ROTHs. There is another set of rules for social security payments and government pensions......but things can get really tricky if the US expat is receiving income from a foreign pension as you have to navigate the treaty and areas like foreign grantor trusts and passive foreign investment corporations.
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