Should I roll my 401(k) into an annuity?

401(k) refers to a section of Internal Revenue code that allows businesses to offer tax deferred savings accounts to employees. The 401(k) compares to an Individual Retirement Account (IRA), which is a section of Internal Revenue code that allows individuals to establish tax deferred savings accounts for themselves. 401(k)s and IRAs are not investments but they hold investments like stocks, bonds, mutual funds, or insurance. When investors rollover a 401(k) account they roll it into an IRA and then they choose the investments they want to hold in it.

An annuity is a type of insurance contract that can be held in an IRA. It combines fixed or variable investments with various guarantees. There are basically three kinds of annuities. A fixed annuity offers a fixed rate of return for a predetermined period of time. A variable annuity invests in stock or bond subaccounts (like mutual funds) and rises or falls in value with the underlying investments. An equity-index annuity provides a minimum fixed rate of return with the opportunity for better returns if the stock market performs well.

Many investment professionals would probably tell you it’s not a good idea to put an annuity in your IRA. Since one of the main advantages of an annuity is that your money grows tax-deferred, it makes little sense to hold one in an account like an IRA, which is already tax-deferred. However, there are exceptions where features in an annuity might make it worth considering:

• If you're retired or very close to retiring and you feel you need more guaranteed income than social security will offer, an annuity can provide an income stream you can’t outlive. The insurance company will essentially create a personal pension for you by providing you a monthly check for life.
• Fixed annuities often provide a higher interest rate than a CD. So if you are considering a CD for your IRA, you might compare rates with a fixed annuity.
• Most variable annuities provide a guaranteed death benefit. So even if the annuity goes down, the death benefit can never go lower than the original amount invested (less any withdrawals). That is an advantage for your beneficiaries that no stock or mutual fund can provide.

Annuities are usually more expensive than other investments and often have surrender charges so they aren’t the best choice for every investor. Before you invest in anything it makes sense to analyze the features, costs, and what's right for your particular situation.