Question: Kevin from Harrison: I saw that annuities are going to be available in 401(k)s. Is this something you would recommend choosing?
A: Currently, only about 10% of 401(k) plans across the country offer annuity options according to the Plan Sponsor Council of America. But, to your point, we wouldn’t be surprised if they start becoming a bit more prevalent. That’s because, back in 2019, the SECURE Act removed some of the legal liability for employers if the insurance provider were to go under or not be able to meet their obligation. Since that worry is now gone, it’s likely more employer plans will start providing the option.
One of the biggest benefits of an annuity is the lifetime income stream it can provide. And, given that company pensions are going the way of the dinosaur, this kind of guaranteed income is hard to say ‘no’ to. But, like we’ve said many, many times in this column over the years, the devil is in the details. Because an annuity – even in a 401(k) – is still a contract with an insurance company. And some types of annuities can be fairly complex and quite expensive, coming with extra fees such as internal fees, a contract fee, and possibly even a fee to withdrawal your own money.
If you absolutely, hands-down want the security of an income stream in retirement, then buying one in your 401(k) could make sense. But, on the flip side, you’ll be paying more over the long run for that security. So, ask yourself what’s more important – a lifetime guarantee, or using ‘regular’ 401(k) investment options that don’t come with extra fees?
Here’s The Allworth Advice: Not all annuities are bad. In fact, for some folks, they can make a lot of sense for their financial situation. But you really need to dig into the nitty gritty details before buying one inside your 401(k). And if you don’t want to (or aren’t sure how to), at least take the time to find a fiduciary financial advisor who will dig in for you. They can help you better understand how the sausage is being made.
Q: Sharice from Villa Hills: I’m 52. I did a Roth conversion a few years ago and I’m thinking of doing another this year. I’ve had my Roth IRA since 2015. Can I access this conversion money right away?
A: One of the key rules with Roth IRAs is that you must wait at least five tax years to make tax-free withdrawals on any earnings on contributions. You also must be at least age 59 ½.
However, when it comes to Roth conversions, there’s a separate five-year rule that you also need to take into consideration: Basically, any chunk of money from a conversion starts its own five-year ‘clock.’ In your case, let’s say you made your first conversion back in 2020 and you’ll follow-through and do another here in 2022. You would be able to withdraw the principal on each conversion starting in 2025 and in 2027, respectively, and it will also be penalty-free even though you’ll still be younger than 59 ½ (though you would still owe taxes on gains since you, again, will have not yet met the age requirement). Then, once you do turn 59 ½, earnings on the converted amounts would also come out tax-free since you’ve easily met the initial five-year rule we first mentioned.