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Key Takeaways
- A reintroduced House bill would let employees age 50 and older roll over some or all of their 401(k) savings into an annuity.
- Financial advisors warn that annuities can be complex, costly, and illiquid.
- The legislation also aims to make 401(k) rollover information easier for workers leaving a job to understand. Many workers don’t fully grasp their distribution options.
Older workers who have 401(k)s may soon have a new investment option thanks to a proposed bill.
The legislation, known as the Retirement Simplification and Clarity Act, aims to allow workers age 50 or older to invest some of their 401(k) funds into an annuity. It also seeks to simplify the rollover information people receive upon leaving a job so they can better manage their money.
“This bipartisan bill helps Americans plan for retirement by making the process simpler and giving them more flexibility,” said the bill’s co-sponsor, James Panetta (D-CA), in a November press release.
The bill was referred to the Ways and Means Committee in November, but no further action has been taken yet.
How Would This Bill Change Retirement Savings?
Workers can already use what’s known as an in-service rollover to move some or all of their 401(k) money into another retirement account tax-free while they’re still employed, according to Joon Um, a certified financial planner and managing owner at Secure Tax & Accounting.
“It’s different from a traditional rollover, which only happens after separation from service,” said Um. “Most employers that allow in-service rollovers limit them to individual retirement accounts.”
But the new bill would give plans the option of allowing workers age 50 or older to roll over their 401(k) funds into an individual retirement annuity. It’s up to each retirement plan sponsor to offer this annuity option.
What This Means For You
Allowing older workers to turn part of their 401(k) savings into guaranteed income through annuities might help people feel more secure in retirement. But it also adds choices that can be costly or confusing. Making rollover rules easier to understand will help workers avoid costly mistakes when moving their savings.
What to Know About Annuities
An annuity is a type of insurance contract that provides periodic payments to retirees. While annuities can be useful for risk-averse retirees seeking guaranteed income, people should exercise caution when purchasing them, as they can be complex and expensive.
Cash invested in an annuity is illiquid and subject to withdrawal penalties, so it’s usually not recommended for young people or anyone who might need to access their money quickly. Annuities often involve complex tax considerations, so it’s important to understand how they work.
“Some of the benefits [of annuities] would be for individuals who do not feel comfortable with market risk and make bad decisions with their portfolio because they let their emotions drive their decisions,” said Jaime Eckels, a CFP and partner at Plante Moran Financial Advisors.
Other experts said annuities’ dependability makes them a useful tool. Dawn Santoriello, a CFP and founder of DS Financial Strategies, recommends annuities to many of her clients. However, she suggests that they only allocate a portion of their portfolio, roughly one-third, to annuities and put the rest in stocks.
“Annuities basically create a pension and provide money that you’ll never be able to outlive,” said Santoriello. “That can play the role as your bond portion.”
Bill Seeks To Simplify Rollover Information
The bill also attempts to simplify the 401(k) information people receive about their funds after they leave a job. The information is provided in a 402(f) notice, which details rollover options, the possible tax consequences of cashing out an account, and more.
Plan sponsors are required to send out these notices, but a 2024 report from the Government Accountability Office (GAO) found that people still had difficulty understanding their rollover options upon leaving an employer.
The GAO survey found that four out of five eligible 401(k) participants were unaware of the different retirement account distribution options. For instance, many people don’t realize they can keep their savings in their current plan, even after they leave. And 20% said they didn’t understand the tax consequences attached to the different choices.
