Tax Deferred Annuity vs 401k: Key Differences and Considerations

Tax deferred annuity and 401k plans are both popular options for saving for retirement, but they have key differences that can impact your bottom line.

A tax deferred annuity can be set up to pay out for a specific period of time, such as 10 or 20 years, or for the rest of your life.

One of the main advantages of a tax deferred annuity is that it can provide a predictable income stream in retirement, which can be especially important for people who need to budget carefully.

Unlike a 401k, a tax deferred annuity typically doesn't have the same contribution limits, allowing you to save more money over time.

A 401k plan, on the other hand, allows you to contribute a portion of your income to a retirement account, and the money grows tax-deferred until you withdraw it.

Tax deferred annuities often come with fees, such as surrender charges, that can eat into your savings if you withdraw money early.

There are a number of factors to consider when thinking about whether it makes sense to hold an annuity in your 401(k). All of this means that there are a number of factors on both sides to consider.

The advantages and disadvantages of buying an annuity within your 401(k) should be carefully weighed.

There are many factors to consider, including the pros and cons of holding an annuity in your 401(k).

Buying a tax-deferred annuity within your 401(k) is a complex decision that requires careful consideration of its advantages and disadvantages.

One major advantage is that an annuity can provide a guaranteed income stream for life, which can be especially beneficial for retirees who want to ensure a steady income.

Holding an annuity in your 401(k) can also provide tax benefits, as the money grows tax-deferred.

Buying an annuity within your 401(k) can provide non-gendered pricing, which means your gender won't affect the price, a significant advantage for women who typically live longer and face higher prices outside of a 401(k).

This is because annuity prices reflect life expectancy, and with non-gendered pricing, men might pay more.

People tend to hold most of their net worth in their retirement accounts and home equity, making it a logical choice to tap a 401(k) to buy an annuity.

You may not have enough non-retirement funds to buy an annuity outside your 401(k), which makes using your retirement savings a practical option.

Annuity payments might be higher within a 401(k) because insurers can save money on marketing with a large pool of potential customers supplied by an employer.

However, it's essential to compare these payments with outside annuities to ensure you're getting the best deal.

Buying an annuity within your 401(k) can be a complex decision, and there are several disadvantages to consider. One major drawback is slower growth, as the returns on annuities may be lower than other investment options, particularly if you prioritize growth over guaranteed income.

You may also face hard-to-change-your-mind situations, as getting money out of an annuity while still in the accumulation phase can be complicated and entail surrender charges. The fewer years you've paid into the annuity, the larger the surrender charge may be.

Another consideration is that annuities have the same tax-deferral benefit as 401(k)s, so you don't get an additional tax benefit by buying an annuity in your 401(k). This is especially true if you have the funds in a taxable account, as suggested by Morningstar's Blanchett.

You may also fail to at least break even, as money used to buy an annuity is generally not available to leave to your spouse, children, or other heirs. However, you can leave money to your heirs if you're willing to pay more for principal protection or period certain benefits.

Some specific disadvantages of buying an annuity in your 401(k) include:

You can purchase various types of annuities in your 401(k) plan, but one popular option is the Qualified Longevity Annuity Contract (QLAC). A QLAC allows you to use up to $145,000 of your retirement savings to buy a contract that defers taxes on Required Minimum Distributions (RMDs).

A QLAC must begin paying out by age 85, and its value is not included in RMD calculations. You can buy a QLAC at age 70, before RMDs kick in at age 73, if you have plenty of retirement income from other sources.

You can buy various types of annuities in your 401(k) plan, including a qualified longevity annuity contract (QLAC), which allows you to defer taxes on Required Minimum Distributions (RMDs).

A QLAC funded with up to $145,000 of your retirement savings can provide a deferral of taxes that accompany RMDs, and its value is not included in RMD calculations.

You'll need to begin receiving payments from a QLAC by age 85, and it's a good idea to consider buying one at age 70 if you have plenty of retirement income from other sources.

Other types of annuities you may be able to purchase in your 401(k) plan include a simple fixed immediate annuity, a variable annuity, and an indexed annuity.

When choosing between a Fixed Index Annuity (FIA) and a 401(k), it's essential to consider the purpose of each. A Fixed Index Annuity provides guaranteed income and potential for growth, while a 401(k) is a retirement savings plan offered by employers.

One key difference between the two is tax treatment. Fixed Index Annuities have tax-deferred growth, whereas 401(k)s also have tax-deferred growth, but with the option for Roth 401(k) contributions, which are made with after-tax dollars.

Contribution limits are another area to consider. There are no IRS-imposed contribution limits for Fixed Index Annuities, but 401(k) contribution limits are $23,500 in 2025, with higher limits for those 50+ and 60-63.

Investment options also vary between the two. Fixed Index Annuities are linked to a stock market index but not directly invested, while 401(k)s offer a wide range of investment options, including stocks, bonds, and mutual funds.

Here's a summary of the key differences between Fixed Index Annuities and 401(k)s:

Ultimately, the choice between a Fixed Index Annuity and a 401(k) depends on your individual financial goals and needs.

To make an informed decision about tax deferred annuity vs 401k, thorough research is essential.

Check the financial strength ratings of the insurance company offering the annuity, as a strong rating from A.M. Best can give you peace of mind.

Compare the fees and payments of the annuity to those available outside your 401(k) to ensure you're getting a good deal.

Before investing in an annuity, make sure the insurance company offering it has strong financial strength ratings from credit rating agencies such as A.M. Best. This will give you peace of mind knowing the company is stable and can meet its financial obligations.

Check how the annuity's fees and payments compare to annuities available outside your 401(k). You might be surprised to find that outside options are more cost-effective.

A 401(k) plan is an employer-sponsored retirement savings plan that offers significant tax advantages. Contributions are often made pre-tax, reducing your taxable income for the year.

The SECURE Act doesn't require plan sponsors to choose low-cost annuities; it only requires the cost to be reasonable. This means you need to do your research to ensure you're getting a good deal.

If the annuities offered within your 401(k) are not satisfactory, rolling over part of your 401(k) to an outside annuity is another option. This way, you can diversify your investments and potentially save money on fees.

If you're considering buying an annuity, you should know that the monthly income it provides can be surprisingly low. For a $100,000 single premium immediate annuity, a 65-year-old male in Massachusetts can expect a monthly payment of $486 for life, with no inflation adjustments and no benefit to his heirs.

To make sure his heirs receive something, he can opt for a period certain of 10 years, reducing his monthly payment by $3 to $483. Alternatively, he can choose a refund of his unused premium, reducing his monthly payment to $443.

The monthly payment varies depending on the initial investment and the individual's age and sex. For example, a 65-year-old female in Massachusetts can expect a monthly payment of $574 for a $100,000 single premium immediate annuity.

Here's a breakdown of the estimated monthly payments for different initial investments and ages:

Keep in mind that these payments are fixed and won't increase with inflation, unlike the returns from an index fund.

Plan sponsors have certain obligations to plan participants under ERISA, but that doesn't mean they've chosen the best option for your 401(k) plan.

The SECURE Act only requires plan sponsors to choose annuities with reasonable costs, not low-cost ones. This means you should check the fees associated with your plan's annuities to ensure they're satisfactory.

Employees have successfully brought lawsuits against 401(k) plan sponsors for excessive investment and administrative fees. This highlights the importance of reviewing your plan's fees carefully.

Rolling over part of your 401(k) to an outside annuity is another option if the ones offered within your plan are not satisfactory.

Retirement planning is a crucial aspect of securing your financial future. Annuities can provide a lifetime of guaranteed income, and one of the biggest concerns for workers and retirees is running out of money in retirement.

Buying an immediate life annuity can give a 65-year-old male the most income among the available options, according to a study by the Center for Retirement Research at Boston College.

A qualified tax-deferred annuity can provide a fixed interest rate for a specific number of years, while a 401(k) retirement plan offers a wide range of investment options, including stocks, bonds, and mutual funds.

Contribution limits for a qualified tax-deferred annuity are the lesser of 100% of earned income or $23,500 in 2025, while a 401(k) plan has a contribution limit of $23,500 in 2025, including catch-up contributions.

Required Minimum Distributions (RMDs) for a qualified tax-deferred annuity start at age 73, just like a 401(k) plan.

Here's a comparison of tax-deferred annuities and 401(k) plans:

Annuities and 401(k) plans both offer tax-deferred growth, but annuities can provide a guaranteed fixed rate for a specific number of years, while 401(k) plans offer variable returns based on investment choices.

A tax-deferred annuity offers tax-deferred growth, allowing you to delay paying taxes on your earnings until you start withdrawing funds or receiving payments.

Both annuities and 401(k)s can offer tax-deferred growth, as stated in Example 2. This means you won't pay taxes on your earnings until you start withdrawing funds or receiving payments, potentially boosting your savings over time.

You can contribute up to $23,500 annually to a 401(k) plan as of 2025, with an additional $7,500 catch-up contribution if you're over 50.

Employers often match contributions to 401(k) plans, providing an immediate return on your investment. As mentioned in Example 6, this can be a significant advantage of 401(k) plans.

A QLAC, or qualified longevity annuity contract, is a type of annuity that can be funded with an investment from a qualified retirement plan, such as a 401(k) or an IRA. According to Example 4, you can use up to $145,000 of your retirement savings account to buy a QLAC.

Here's a comparison of tax-deferred annuities and 401(k)s:

A tax-deferred annuity may charge surrender fees if you want to access your funds early, which can eat into your return. This is another key difference between annuities and 401(k)s.