Saving for retirement is one challenge.
Figuring out how to use those savings once you retire is another.
When your regular paycheck stops, your income may need to come from several different places, including:
The goal is to create an income strategy that helps you pay your monthly expenses while making your savings last.
LEARN ABOUT RETIREMENT INCOME OPTIONS
During your working years, income is relatively straightforward.
You work. You receive a paycheck.
Retirement is different.
You may have several income sources arriving at different times and receiving different tax treatment.
That's why retirement income planning should consider more than simply:
“How much money have I saved?”
You also need to think about:
For some retirees, an annuity can become one part of that strategy.
An annuity is a contract with an insurance company designed for retirement or other long-term financial goals.
Depending on the type of annuity, you may deposit money in a lump sum or through multiple payments.
In return, the insurance company may provide:
Annuities can be structured to begin producing income immediately or at a later date.
An annuity is not the same thing as a bank savings account.
Different annuities have different guarantees, risks, fees, withdrawal provisions, and surrender periods.
One of the biggest concerns people have when they retire is:
“What happens if I live longer than I expected?”
Annuities can be used to help create predictable retirement income.
Depending on the contract, an annuity may provide income:
This can help turn a portion of retirement savings into an income stream designed around your retirement needs.
Certain annuity guarantees depend on the financial strength and claims-paying ability of the insurance company issuing the contract.
One basic way to categorize annuities is by when you want the income to begin.
With an immediate annuity, income typically begins relatively soon after you purchase the contract.
Someone may consider an immediate annuity when they already have a lump sum of money and want to convert it into regular retirement income.
A deferred annuity is designed to accumulate value before income begins.
You may purchase the annuity today but wait until later to begin taking retirement income.
During the accumulation period, growth inside the annuity is generally tax-deferred.
This distinction is important.
Annuities can provide tax-deferred growth, meaning you generally don't pay current income tax on growth inside the contract while it remains there.
But taxes may become due when money is withdrawn.
Exactly how an annuity is taxed depends in part on what type of money was used to purchase it.
A qualified annuity is held inside a tax-qualified retirement account such as an IRA or certain employer retirement plans.
If the money going into the account was pre-tax, withdrawals are generally taxable as ordinary income when received.
Putting an annuity inside a traditional IRA or another tax-deferred retirement account generally does not create an additional layer of tax deferral because the retirement account is already tax-deferred.
A nonqualified annuity is generally purchased with money that has already been taxed.
Because you've already paid tax on the money you contributed, you generally aren't taxed on that same principal again.
The growth or earnings inside the contract can be taxable when distributed.
For certain withdrawals from a nonqualified annuity before annuity payments begin, the IRS generally treats earnings as coming out before your original after-tax investment.
Age matters when you're withdrawing retirement money.
Taxable distributions from many qualified retirement plans and nonqualified annuity contracts taken before:
Age 59½
may be subject to an additional 10% federal tax in addition to regular income taxes unless an IRS exception applies.
That doesn't mean you can never access the money earlier.
It means you should understand the potential tax consequences before taking a distribution.
Taxes aren't the only consideration when accessing an annuity.
Many deferred annuities have a period during which certain withdrawals can result in a surrender charge from the insurance company.
Those charges commonly decline over time, although the exact schedule depends on the contract.
Some annuities also allow a certain amount to be withdrawn each year without a surrender charge.
Always understand how accessible your money will be before purchasing an annuity.
An annuity is generally designed to be a long-term financial product, not a place for money you expect to need immediately.
If you've spent years contributing to a 401(k), you may have an important decision when you retire or leave your employer:
What should you do with the money?
Depending on your former employer's plan and your circumstances, your options may include:
A 401(k) rollover moves eligible retirement funds from the employer plan to another eligible retirement account.
When structured correctly, a rollover can generally allow your retirement savings to continue tax-deferred without creating an immediate taxable distribution.
There are two very different ways a rollover can happen.
With a direct rollover, your 401(k) funds are transferred directly to another eligible retirement plan or IRA.
A properly completed direct rollover generally isn't subject to the mandatory federal withholding that applies when an eligible rollover distribution is paid directly to you.
This can make the process much simpler.
If the retirement plan sends an eligible rollover distribution directly to you, the rules become more complicated.
Generally, you have:
60 days
from the date you receive the distribution to complete an eligible rollover into another retirement plan or IRA.
Missing that deadline can cause the distribution to become taxable unless you qualify for an exception or waiver.
But there's another issue.
When an eligible taxable distribution from an employer retirement plan is paid directly to you instead of being directly rolled over, the plan generally must withhold:
20% for federal income taxes.
Imagine you have $100,000 in a 401(k).
If the plan sends the distribution directly to you, it could generally withhold:
$20,000
and you would receive:
$80,000
If you want to complete a rollover of the entire $100,000 within 60 days, you would generally need to replace that $20,000 from another source and deposit the full $100,000 into the receiving retirement account.
Otherwise, the portion not rolled over may become taxable and could potentially be subject to an additional early-distribution tax depending on your age and circumstances. (IRS)
This is one reason direct rollovers are often worth discussing before requesting a check from your retirement plan.
It depends on where the money goes.
A properly completed rollover of eligible pre-tax funds generally does not create current taxable income.
Taxes are generally deferred until you later take taxable withdrawals.
Moving pre-tax retirement money into a Roth account is different.
This is generally treated as a Roth conversion, and the converted pre-tax amount can create taxable income for the year of the conversion.
Taking the Money Yourself
If you take a taxable distribution and don't complete an eligible rollover, the taxable amount generally becomes part of your income for that year.
Depending on your age, an additional early-distribution tax may also apply.
Here's an important rule that can sometimes be overlooked when considering a rollover.
Normally, retirement distributions taken before age 59½ may be subject to a 10% additional federal tax.
However, there's an exception for certain distributions from an employer's qualified retirement plan if you separate from that employer during or after the calendar year in which you turn:
Age 55
The exception generally applies to the employer plan—not an IRA. (IRS)
That creates an important planning consideration.
Rolling your entire 401(k) into an IRA could change your ability to use this particular exception.
If you're retiring or leaving a job between ages 55 and 59½ and expect to need money from the account, understand this rule before completing a rollover.
You also can't leave most pre-tax retirement money untouched forever.
Under current rules, many retirement account owners must begin taking Required Minimum Distributions, commonly called RMDs.
For people currently subject to the newer SECURE 2.0 age rules, RMDs generally begin at:
Age 73
SECURE 2.0 increases the applicable RMD age to 75 for a later group of retirees—generally those who attain age 74 after December 31, 2032.
Traditional IRAs generally require distributions beginning based on these rules even if you're still working.
Some employer retirement plans may allow certain employees to delay RMDs until retirement, depending on the plan and ownership rules.
For someone whose applicable RMD age is 73, the first RMD generally must be taken for the year they turn 73.
You can generally delay that first RMD until:
But subsequent RMDs are generally due by:
That creates an important tax consideration.
If you delay your first RMD until the following year, you may end up taking two taxable RMDs in the same calendar year—the delayed first distribution by April 1 and the next distribution by December 31.
That could increase your taxable income for that year.
Required Minimum Distributions also generally cannot be rolled over into another retirement account.
When deciding how much retirement income to take in a particular year, remember that taxable distributions can affect your overall taxable income.
That can potentially influence:
The amount you withdraw can sometimes matter just as much as where you withdraw it from.
This is why tax planning and retirement income planning often need to work together.
A few numbers are worth remembering:
Certain employer-plan distributions after separating from service may qualify for an exception to the 10% additional early-distribution tax.
The 10% additional federal tax on early distributions generally stops applying to retirement plan and IRA distributions, although normal income taxes may still apply.
Generally the deadline for completing a rollover when an eligible retirement distribution is paid directly to you.
Current RMD starting age for many retirees under SECURE 2.0 rules.
Potential deadline for a delayed first RMD.
General deadline for subsequent annual RMDs.
A rollover can make sense in some situations.
But “I'm retiring, so I should roll over my 401(k)” shouldn't be an automatic decision.
Before moving the money, compare things such as:
Sometimes leaving money in an employer plan may make sense.
Sometimes a rollover may provide advantages.
The right decision depends on your particular situation.
An annuity can be useful for someone who values predictable income or wants to transfer certain retirement risks to an insurance company.
But it shouldn't be purchased simply because someone says it is “safe” or “guaranteed.”
Before choosing an annuity, understand:
Understand what you're giving up in exchange for the guarantees you're receiving.
Different annuity types can have very different features, risks, and costs.
Retirement planning doesn't end when you stop working.
That's when your savings have to start doing a different job.
Instead of simply accumulating money, you're now deciding:
How much should I take?
Where should it come from?
How long does it need to last?
How much tax will I owe?
How much income can I count on every month?
Annuities, 401(k)s, IRAs, Social Security, pensions, and other assets can all play different roles.
The goal is to make those pieces work together.
If you're approaching retirement, changing jobs, or deciding what to do with an old 401(k), take time to understand your options before moving your money.
Senior Savings Network can help you understand the retirement income and insurance options available to you and the questions you should consider before making a decision.
A rollover or annuity decision can have long-term tax and financial consequences.
We encourage you to consult an appropriate tax professional, financial professional, or plan administrator regarding your individual tax and retirement-plan situation.
Call Senior Savings Network at 1-800-729-9590.
REVIEW MY RETIREMENT INCOME OPTIONS
Important Information
This information is provided for general educational purposes and should not be considered individualized investment, tax, accounting, or legal advice.
Tax treatment depends on individual circumstances and tax laws can change. Consult a qualified tax professional regarding your specific situation.
Annuities are insurance contracts. Product features, guarantees, surrender charges, withdrawal provisions, fees, interest-crediting methods, income options, riders, and availability vary by insurance company and contract. Guarantees are subject to the financial strength and claims-paying ability of the issuing insurer.
Withdrawals from retirement accounts or annuities may be subject to ordinary income taxes and, in some situations, additional federal taxes. A rollover, Roth conversion, or retirement-plan distribution can have significant tax consequences.
Before rolling assets from an employer-sponsored retirement plan, carefully compare the features, fees, investment choices, withdrawal provisions, protections, and other benefits of the existing plan with the account or product being considered.
