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Annuity vs. 401(k): Key Differences Compared

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401(k) vs. Annuities

If you are approaching retirement or already enjoying it, deciding what to do with your 401(k) is a big and potentially challenging decision. This guide compares annuity vs. 401(k) plans head-to-head.
We will thoroughly compare and contrasts the differences, advantages, and disadvantages of these two retirement savings vehicles.

If you are contemplating whether or not it is a good idea to roll over your 401(k) to an annuity then this guide is written just for you. Let’s dive in!

Understanding the Differences Between Annuities and 401(k) Plans

An annuity is a financial product that offers individuals a consistent income stream, typically during retirement. It involves a contract between an individual and an insurance company, where the individual makes either a lump sum or regular payments to the insurance company. In return, the insurance company agrees to provide periodic payments for a fixed term or the individual’s lifetime.

In contrast, a 401(k) is a retirement savings plan offered by employers. Participants in a 401(k) contribute a portion of their paychecks, which is then invested in various assets like stocks, bonds, and mutual funds. The funds in a 401(k) grow tax-free until withdrawal, usually after retirement.

The primary distinction between annuities and 401(k) plans lies in the guaranteed income stream provided by annuities, either for a specific term or lifetime. On the other hand, a 401(k) is a savings plan that lacks income guarantees but offers the potential for investment growth. Annuities are classified as insurance products, while 401(k) plans are retirement savings plans. 

Additionally, annuities often entail higher fees and fewer investment options compared to 401(k) plans.

Advantages of An Annuity

An annuity offers investors many benefits – we’ve listed five top benefits of annuities below.

  • Guaranteed Income: One of the main benefits of an annuity is the security of a guaranteed lifetime income stream. This can provide security and peace of mind, especially in retirement.
  • Tax Deferral: Annuities grow tax deferred, which means your investment grows tax-free until you begin to receive payments. This can result in a larger overall payout and more tax-efficient withdrawals in retirement.
  • Guaranteed Returns: Certain types of annuities, such as fixed annuities, offer the potential for higher returns than traditional savings accounts or certificates of deposit (CDs). This can provide a higher level of income in retirement.
  • Estate Planning: You can elect a beneficiary to receive your annuity’s full account value at death. Annuity death benefits typically bypass a costly probate process.
  • Diversification: An annuity is a non-correlated asset in your retirement portfolio and provides supplemental guaranteed retirement income.
Infographic listing the top 8 advantages of purchasing an annuity. My annuity store, inc. Logo bottom center.

The Advantages of a 401(k) Plan

401(k) plans offer several benefits to individuals, including:

1. Convenient and Automatic Savings: Many 401(k) plans enable automatic contributions from paychecks, facilitating retirement savings without the need for constant deliberation.

2. Employer Matching Contributions: Some employers match their employees’ contributions to 401(k) accounts, leading to additional savings.

3. Tax Advantages: Contributions to a 401(k) are made with pre-tax dollars, reducing an individual’s taxable income and potentially lowering their tax bill for the current year. The funds within a 401(k) grow tax-free until retirement.

4. Investment Options: 401(k) plans typically provide a range of investment options, such as stocks, bonds, and mutual funds. This flexibility allows individuals to align their investments with their risk tolerance and financial goals.

5. Portability: Individuals can transfer their 401(k) accounts if they switch jobs, enabling them to maintain their retirement savings throughout their careers.

6. Potential for Higher Returns: Over the long term, 401(k) investments have the potential to yield greater returns compared to traditional savings accounts or certificates of deposit (CDs), potentially leading to a substantial nest egg in retirement.

401(k) vs. Annuities: Long Term Performance Expectations

Annuities are primarily designed to provide a guaranteed income stream, resulting in lower returns compared to 401(k) plans, as insurance companies must ensure regular payments. As a result, the investment objective of annuities is to offer a steady income stream rather than maximizing investment returns.

On the other hand, 401(k) plans serve as retirement savings plans and typically invest in diversified portfolios, including stocks, bonds, and other assets. The primary investment objective of a 401(k) is to maximize returns over the long term, potentially leading to a significant retirement fund. However, returns on a 401(k) are not guaranteed and can fluctuate based on market conditions.

Annuity vs. 401(k) Investment Risks Comparison

Risks Associated with Investing in Annuities

Investing in annuities and 401(k) plans involves different risks, and it is crucial to understand them before making decisions.

Annuities, despite their aim to provide a guaranteed income stream, carry certain risks. 

Market risk is one such risk, as some annuities, such as variable annuities, are tied to the performance of underlying investments, making them susceptible to market fluctuations. 

Credit risk is another concern, as the financial stability of the insurance company issuing the annuity affects its ability to make guaranteed payments, potentially exposing annuity holders to credit risk.

Longevity risk arises when individuals outlive the guaranteed income from their annuity, leaving them exposed to financial uncertainty. 

Additionally, inflation risk is present, as the value of the guaranteed income may not keep pace with inflation, diminishing purchasing power over time.

Possible Risks Associated with 401(k) Plans

It is important to note that there are also risks associated with 401k plans.

Market risk is a prominent factor as the value of a 401(k) can fluctuate based on the performance of the underlying investments. 

Economic downturns can lead to a decrease in the account’s value. 

Investment risk arises from the responsibility of individuals to choose their own investments within the 401(k) plan, with the possibility of poor investment performance. 

Concentration risk is another concern, particularly when individuals heavily invest in a single stock or sector, increasing the potential for significant losses if that stock or sector performs poorly.

Additionally, plan-specific risks associated with the terms, features, and management of a 401(k) plan can impact its performance. High fees, limited investment options, or poor plan management can negatively affect the overall outcome.

Taxation of 401(k) Plans and Annuities Compared

When comparing the tax implications of annuities and 401(k) plans, there are distinct differences to consider. Contributions to a 401(k) plan are made pre-tax, reducing an individual’s taxable income for the current year. 

The funds within the 401(k) grow tax-deferred until withdrawn during retirement. In contrast, annuities are subject to different tax treatments based on the type of funds used and the type of annuity contract you purchase. Immediate annuities are typically taxed differently than other types of annuities.

Annuitized payments are taxed using an exclusion ratio because a portion of each payment is considered to be your original principal. Other types of deferred annuities allow investments to grow tax-deferred until withdrawals begin.

If you buy an annuity with qualified funds (pre-tax dollars) 100% of your withdrawals will be taxable at your ordinary income tax bracket. 

A non-qualified annuity is an annuity that is not purchased with tax-advantaged funds, such as from a 401(k) or IRA. You will only pay tax on your earnings with you withdraw your money.

How is Your 401(k) Taxed When You Retire

The funds within the 401(k) grow tax-deferred until withdrawn during retirement. 

Traditional 401(k) withdrawals are taxed at an individual’s current income tax rate. In general, Roth 401(k) withdrawals are not taxable provided the account was opened at least five years ago and the account owner is age 59½ or older. Matching contributions to a Roth 401(k) made by an employer are subject to income tax.

Should You Rollover Your 401(k) into an Annuity?

When making a decision and comparing an annuity vs. 401(k) plan, several key factors should be considered:

Investment objectives: Determine your retirement savings goals. An annuity may be suitable if you seek a guaranteed income stream, while a 401(k) may be preferable for those aiming to maximize potential investment returns.

Risk tolerance: Assess your comfort level with potential investment fluctuations. Annuities provide a guaranteed income stream but may yield lower returns compared to a 401(k). 401(k) plans offer higher return potential but come with increased market risk.

Financial situation: Evaluate your current financial position and retirement income needs. Annuities can be beneficial for individuals in need of a guaranteed income source, while a 401(k) may be preferable for those willing to take on more risk for potentially higher returns.

Age and retirement goals: Consider your proximity to retirement and your desired timeline. Annuities can be a suitable choice for individuals nearing retirement, providing a guaranteed income source for life. If retirement is further away, a 401(k) allows for a longer period to benefit from potentially higher returns.

Tax implications: Understand how contributions and distributions are taxed for both annuities and 401(k) plans to make an informed decision.

Fees and costs: Evaluate the associated fees and costs of each investment option, as higher fees can impact overall returns.

Frequently Asked Questions

Turning your 401(k) into an annuity depends on your individual circumstances and financial goals. An annuity can provide a guaranteed income stream in retirement, which may be beneficial if you prioritize financial security.


However, it is important to consider factors such as your risk tolerance, desired investment returns, and other retirement income sources before making a decision. Consulting with a financial advisor can help you determine if converting your 401(k) into an annuity aligns with your specific needs.

The answer depends on your personal preferences and financial objectives. Annuities offer a guaranteed income stream and protection against market fluctuations, making them suitable for individuals seeking stability.

On the other hand, 401(k) plans provide an opportunity for potentially higher investment returns but come with market risks. Additionally, 401(k) plans offer greater flexibility for accessing funds before retirement.

Assessing your risk tolerance, desired retirement income, and financial goals can help determine which option is better suited to your needs.

The most significant advantage of an annuity is the assurance of a guaranteed income stream during retirement. Annuities can provide a steady source of income that lasts for a specific period or even for life, offering financial security and peace of mind.

This feature sets annuities apart from other retirement investment options that are subject to market fluctuations and uncertain returns.

Yes, in many cases, you can transfer or roll over your 401(k) funds into an annuity. This process is known as a 401(k) to annuity rollover. However, it is essential to understand the implications and potential costs involved.


Before making this decision, consider factors such as surrender charges, tax consequences, annuity fees, and the impact on your retirement income strategy. Seeking guidance from a financial professional can help you navigate the process and make an informed choice.

Rolling over your 401(k) into an annuity carries certain risks that should be carefully considered. These risks include the potential loss of investment flexibility and liquidity, as annuities restrict access to funds compared to 401(k) plans.

Additionally, annuities are subject to fees and charges, such as surrender fees for early withdrawals. It is crucial to thoroughly evaluate the terms and conditions of the annuity, including the financial strength of the insurance company issuing it, to mitigate potential risks.


We strongly recommend that you seek professional advice to help you assess the suitability and risks associated with a 401(k) to annuity rollover.

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