Avoid IRA Annuities

When you retire, should you roll over your 401k into an IRA? Yes. Should you roll over your 401k into an IRA Annuity? Ummmm probably not, says Walter Updegrave. An IRA Annuity is basically an annuity held inside an IRA and it’s probably going to be too expensive for what you’re getting out of it. An annuity is generally very expensive but the benefit is that money grows inside of it tax-free, but it’s not a strong selling point of an IRA annuity because money inside IRAs and 401ks is already growing tax-free – you don’t need an expensive fee generating annuity for that.

So, what’s the other draw of IRA annuities? There are living benefits known as GMIB and GMWB. GMIB stands for guaranteed minimum income benefit which is a guarantee of annual income if you hold the annuity for a pre-specified time period, usually 10 years, even if the market tanks. GMWB stands for guaranteed minimum withdrawal benefit that guarantees you’ll be able to withdraw a percentage (4-6% usually) of the original investment regardless of the market performance.

Ultimately the main knock against IRA Annuities is cost, the fees, and all the rules and restrictions regarding what you can do with an IRA. It’s probably a better idea to rollover your 401k into an IRA and stick it in a nice balanced mix of investments, an index fund, or a target retirement fund.