401k Rollover to an Annuity Guide: Benefits, Rules, and Processes

Whether you have relocated permanently, are preparing for retirement abroad, or are exploring tax-efficient income options, it is essential to understand how to handle your US-based retirement accounts cross-border.

One strategy under consideration by some expats is rolling over a 401(k) into a US-based annuity. While this approach can provide a predictable income stream, it may also carry limitations in flexibility, tax exposure, and portability across jurisdictions. In many cases, an IRA rollover may offer a more suitable and cost-effective solution.

In this guide, we examine how a 401k rollover to an annuity works, its advantages and drawbacks for non-resident individuals, and whether alternative strategies—such as IRA transfers—may better support your long-term retirement and tax objectives.

What Is an Annuity?

An annuity is an insurance contract that allows you to invest a lump sum or make periodic contributions to an insurer in exchange for receiving an income stream in retirement.

Purchasing an annuity can be an effective approach to achieving retirement security. It provides regular guaranteed cash flow and may offer protection from inflation and market volatility that can affect other retirement plans, such as 401(k) and 403(b).

Annuities can be funded with either pre-tax or after-tax dollars, depending on the type purchased. In both cases, investment earnings grow on a tax-advantaged basis until you begin withdrawals, at which point taxation depends on the annuity’s funding source.

You can set the income payments to commence immediately or at a future date. The income stream can last throughout your life or be spread across a specific number of payments or years. However, the payments you receive will be determined by various factors, including:

• Age
• Premium value
• Payout duration
• Accumulation period duration
• Rate of return on the selected annuity plan.

In general, larger premiums, shorter lifespans, or delay of payments until much later in life will result in higher monthly income rates. There are instances where the total income received from an annuity can exceed the premium amount invested, such as when:

• The annuity records stronger investment growth
• There is a longer accumulation period before initiating withdrawals
• You outlive your life expectancy, extending the payout period

You can also arrange for your annuity payments to last as long as your spouse—or some other nominated beneficiary—is alive if you pass away before them.

What Types of Annuities Exist?

Before initiating a rollover, it is essential to understand your options and determine which type of annuity best aligns with your needs. You may transfer your 401(k) funds to:

1. Fixed annuities
2. Variable annuities
3. Indexed annuities
4. Immediate annuities
5. Deferred annuities

Fixed Annuities

Fixed annuities provide guaranteed returns, disbursed over a predetermined period. With fixed annuities, you can be certain of the minimum interest amount your investments will generate.

The interest earned on this type of annuity is moderate. As a result, fixed annuities are an appealing option for expats approaching retirement who are more interested in protecting wealth than earning high interest rates to grow their savings.

They provide stability and financial security by guaranteeing a steady stream of income for the duration of your lifetime or for a specified period, as agreed upon in the contract.

Variable Annuities

Variable annuities provide returns based on the performance of your investments. The annuity provider allows you to choose which assets to invest in from the available mutual funds in their portfolio.

The payout you receive will depend on the performance of your investments. Strong performance will increase the amount paid out by the annuity provider and vice versa.

Variable annuities may be suitable for expats with a higher tolerance for risk and market fluctuations. They offer the potential to enhance retirement savings and support a higher standard of living during retirement.

Indexed Annuities

Indexed annuities allow you to combine the security of fixed annuities and the high-growth potential of variable annuities. When you purchase an indexed annuity, you will receive a set minimum payment plus interest, but some of the expected returns will depend on market fluctuations and the performance of a select stock market index, such as the Nasdaq or the S&P 500.

Although indexed annuities can be more rewarding than fixed annuities, they are more complicated to manage and entail higher fees.

Indexed annuities are suitable for expats seeking steady growth and consistent cash flow from their retirement savings, while assuming less risk than is typically associated with traditional variable annuities.

Immediate Annuities

Immediate annuities commence providing income monthly or annually, immediately after the initial lump sum deposit.

Establishing an immediate annuity is a beneficial pension planning strategy for expats with larger 401(k)s who are one or two years away from retirement and want to streamline financial management by converting their pensions into defined income payments.

Deferred Annuities

Deferred annuities start paying out income at a specified future date, following the purchase of one or more premium contributions over time. The deposits and accrued interest are left to accumulate unaffected by tax until you elect to begin income withdrawals or annuitise the contract.

For instance, you can purchase an annuity plan at 60 and defer receiving income payments until you turn 80. Deferred annuities are a particularly attractive option for expats decades away from retirement.

By extending the deferral period, the annuity has greater potential for growth and a shorter payout duration, which may result in higher income payments during retirement.

Can You Roll Over a 401(k) to an Annuity as an Expat?

International expats who have accumulated savings in a 401(k) plan can roll over their funds into an annuity for more efficient cross-border access and management. The rollover process remains straightforward, as long as it adheres to IRS rules.

When transferring pension funds from a 401(k) to an annuity, you have two options:

1. Direct rollover
2. Indirect rollover

Should You Opt For a Direct Rollover or an Indirect Rollover?

When transferring pension funds from a 401(k) to an annuity, expats, particularly those classified as non-resident aliens (NRAs), are advised to choose a direct rollover.

Direct Rollover

A direct rollover involves the 401(k) administrator transferring funds directly to the financial institution holding your annuity. The transaction is executed directly between the financial institutions, reducing the risk of rollover mistakes or delays. This method also mitigates withholding tax, potential tax complications, and penalties that could arise from managing funds across borders.

Indirect Rollover

In an indirect rollover, the 401(k) administrator distributes the funds to you directly, and you are required to deposit the funds into an annuity within 60 days. Failure to do so results in the funds being treated as an early withdrawal, incurring early withdrawal penalties.

For non-resident aliens (NRAs), the IRS applies a default 30% withholding tax on distributions unless a tax treaty applies and Form W-8BEN is submitted. US residents face 20% withholding.

This withholding tax can be reclaimed when filing a US tax return, but for expats, especially those with no US tax obligations, this creates unnecessary administrative complexity and delays.

401(k) Rollover to Annuity Rules

The table below highlights some of the rules you may need to adhere to to successfully execute a rollover:

How Long Does the 401(k) to Annuity Rollover Process Take?

The timeline for completing a 401(k) rollover into an annuity depends on several factors, including:

• Your 401(k) plan type and annuity structure: Processing rollovers from Roth 401(k) plans take longer than traditional 401(k)s due to specific requirements and tax implications.
• The amount of paperwork required: Your annuity provider and 401(k) administrator will require you to complete different forms and documents to validate the rollover.
• The efficiency of the 401(k) administrator and the insurance company: Some organisations have streamlined and automated workflows that shorten process durations.
• Whether you use a direct or indirect transfer method: Direct rollovers typically take a few days to execute, while indirect rollovers take longer.

In general, the process may take several weeks to finalise, but you can monitor progress or even expedite it by maintaining regular communication with plan administrators.

Is a 401(k) Rollover to an Annuity Tax-Free?

The tax implications of rolling over funds from a 401(k) to an annuity depend on whether you’re rolling over from a:

• Traditional 401(k)
• Roth 401(k)

While federal tax rules apply uniformly, some US states may tax annuity income even for non-resident aliens, particularly if you retain former residency or other state ties.

States such as California and New York apply broad nexus rules, which may create ongoing tax obligations despite living abroad.

Confirm your state exposure with a qualified adviser before initiating any rollover or distributions.

Traditional 401(k) to Annuity Rollover

When you transfer funds from a traditional 401(k) into a qualified annuity, the IRS treats the transaction as a rollover rather than a taxable distribution, meaning no immediate taxes are due. The annuity maintains tax-deferred status, and income taxes will only apply once you begin receiving distributions.

However, if you withdraw funds from the annuity before the end of the contract’s surrender period, you may incur both a surrender charge imposed by the insurer and applicable income taxes on the withdrawn amount.

Roth 401(k) to Annuity Rollover

Since contributions to a Roth 401(k) are made with after-tax dollars, you will not incur taxes on these funds when using them to purchase an annuity, provided you follow the proper procedures. Additionally, when you begin receiving income from the annuity, those payments will also be tax-free, assuming all conditions are met.

Why Should You Rollover 401(k) to an Annuity?

There are several advantages to executing a 401(k) rollover to an annuity as part of your expat retirement planning strategy. They include:

• Guaranteed investment principal
• Lifetime income protections
• Convenient payout structures
• Extended tax deferrals
• Currency risk when living abroad
• Increased retirement contributions

Guaranteed Investment Principal

The value of your 401(k) is directly influenced by investment performance and market volatility. In the event of poor asset performance or a market downturn, the total value of your retirement savings may be significantly lower than expected.

If you opt for a fixed or indexed annuity, the benefits you receive aren’t reliant on stock market performance because the insurance company assumes the risk of investing your funds and provides you with a guaranteed minimum interest on your principal.

Regardless of investment performance, your principal remains protected and will be returned to you along with any accrued interest.

Lifetime Income Protections

Executing a 401(k) rollover into an annuity can mitigate the risk of depleting retirement assets prematurely, reducing the likelihood of needing to re-enter the workforce to meet ongoing financial obligations.

This arrangement guarantees a steady stream of income during retirement, as the annuity provider is contractually bound to deliver scheduled payments either for the duration of your lifetime or for a predetermined period.

Convenient Payout Structures

Plans like 401(k) impose a minimum age requirement (59 ½) before distributions can be taken without incurring early withdrawal penalties.

While annuities provide structured, predictable income, they often limit flexibility. Many contracts impose rigid payment schedules, surrender charges for early withdrawals, and restrictions on access to principal.

By contrast, IRAs generally allow greater control over timing, investment choice, and partial withdrawals without contractual penalties.

Payments may begin immediately or be deferred to a future date, with the income stream structured to continue either for a fixed term, such as 20 years, or for the lifetime of the annuitant and, if elected, their spouse.

You can purchase different add-ons—known as riders—to customise your annuities further. For instance, you can buy a death benefit rider so that your guaranteed minimum payout or any balance left in your account after you pass away is paid to selected beneficiaries.

Extended Tax Deferrals

When utilising retirement vehicles such as traditional 401(k), 403(b), or IRA plans, you must begin taking required minimum distributions (RMDs) once you reach age 73. Failure to withdraw the mandated amounts may result in a penalty of up to 50% of the undistributed amount.

A 401(k) rollover to an annuity may allow you to delay RMDs and the associated tax liability until age 85 if structured as a Qualifying Longevity Annuity Contract (QLAC). This strategy can reduce taxable income in early retirement, lower Medicare surcharges, and support continued employment or tax deferral.

RMD Changes Under SECURE Act 2.0 (2025 Update)

• RMD age increased from 72 to 73 in 2023.
• RMD age increases again to 75 in 2033.
• Roth 401(k)s are exempt from RMDs during lifetime from 2024 onwards.
• RMD penalty reduced from 50% to 25%, or 10% if corrected within two years.

Currency risk when living abroad

If you reside outside the United States and receive annuity payments in US dollars (USD), you are exposed to currency exchange risk. Changes in exchange rates may cause significant variation in the local value of your retirement income.

For example, annuity payments received in GBP or EUR may fluctuate from month to month, depending on foreign exchange (FX) movements. This volatility can affect your ability to budget, maintain purchasing power, and plan for consistent living expenses abroad.

To mitigate this risk, expats may wish to:

• Diversify retirement assets across multiple currencies.
• Structure income in their country of residence’s currency.
• Consider partial lump-sum conversion at favourable exchange rates.
• Explore currency hedging strategies through professional advisers.

Addressing FX exposure is essential for long-term retirement stability, especially in jurisdictions with weaker currencies or volatile exchange regimes.

Increased Savings Potential

While 401(k) plans impose annual contribution limits, individuals seeking additional retirement savings capacity can utilise non-qualified annuities, which are funded with after-tax dollars and are not subject to contribution caps. The absence of contribution limits allows individuals to invest larger amounts than what is permitted in traditional retirement accounts, thereby offering a greater opportunity for wealth accumulation.

Note that if you’re rolling over from a traditional 401(k) funded with before-tax contributions to a non-qualified annuity, you’ll no longer benefit from the fund’s tax-deferred status. However, a rollover from an after-tax retirement account like a Roth 401(k) to a non-qualified annuity will remain tax-exempt, but you will incur taxes on any earnings gained from your Roth contributions.

Do Double Tax Agreements Affect Annuity Income?

Double tax agreements (DTAs) play a significant role in how annuity income is taxed for international expats. DTAs are treaties between two countries that aim to prevent individuals from being taxed twice on the same income—once in the country of origin (where the income is generated) and once in the country of residence.

The key implications of DTAs on annuity income are as follows:

• Taxing rights: DTAs specify which country has the right to tax income based on your tax residency. For example, if you are a tax resident in a country with a DTA with the US, the income you receive from a US-based annuity might only be taxed in your country of residence, or the tax rate in the US may be reduced.
• Reduced withholding tax: Without a DTA, the country where the annuity is issued (the US) may withhold tax at the standard rate—often 30% for Non-Resident Aliens (NRAs). A DTA can reduce or eliminate this withholding tax rate.
• Avoiding double taxation: DTAs typically allow for a credit or exemption to prevent or mitigate double taxation. For example, if your US annuity income is taxed in the US, your country of residence may provide a foreign tax credit to offset this US tax liability, reducing your total tax burden.

Why Should You Consult a Cross-Border Financial Adviser Before Rolling Over a 401(k) to an Annuity?

As with any financial investment, you must balance the advantages of transferring your 401(k) funds to an annuity against any risks and downsides. Consulting with a cross-border pension specialist is critical for minimising potential drawbacks associated with annuities, such as:

A financial adviser can help address each of these potential issues by:

• Navigating costs and fees: A financial adviser can analyse all associated costs, including commissions, administrative fees, and any extra charges for riders, helping you assess the true cost of the annuity relative to its benefits.
• Understanding surrender charges: They can explain the penalties and conditions related to early withdrawals, helping you decide whether an annuity suits your liquidity needs, and provide alternatives if required.
• Simplifying complex annuity structures: Advisers can clarify the complex structures of annuities, helping you understand how they differ from traditional retirement plans, and advise you on whether the benefits outweigh the complexity.
• Accounting for liquidity needs: They evaluate whether the annuity’s withdrawal provisions align with your long-term financial objectives, ensuring you understand your access to funds and recommending alternative products that provide greater flexibility, if necessary.

How To Perform a Rollover of a 401(k) to an Annuity?

Transferring your funds from a 401(k) plan to an annuity will typically involve the following steps:

1. Consult a financial adviser
2. Select your preferred annuity product
3. Inform the insurance company of your intentions
4. Send rollover instructions to your 401(k) administrator

Consult a Financial Adviser

If you don’t have ample experience with financial products like annuities or processes like 401(k) rollovers, it’s easy to make mistakes that put you at a disadvantage and hinder your retirement plans.

Speaking to financial advisers like those at Titan Wealth International can help you identify the benefits and costs of transferring your pension to an annuity, taking your needs, circumstances, and financial goals into account.

A financial adviser can clarify the pension transfer regulations and the tax implications associated with any annuity option or rollover method you select. They can also manage the entire process to ensure the rollover is executed efficiently, without delays or complications.

Select Your Preferred Annuity Product

Compare the fees, taxes, surrender rules, interest rates, and other relevant product information to determine the most sensible choice that aligns with your retirement goals. Confirm whether you’ll have to pay extra to access features like death benefits, income riders, and terminal illness riders.

You may use credit rating services like Fitch, Moody’s, AM Best, and Standard and Poor’s to confirm that the insurer is creditworthy and financially stable.

Inform the Insurance Company of Your Intentions

After selecting your insurance provider and annuity product, promptly notify the insurer of your intent to fund the annuity using proceeds from a 401(k) rollover. Engage directly with the insurance company’s rollover department to confirm the specific procedural requirements.

Send Rollover Instructions to Your 401(k) Administrator

Once your annuity contract has been selected and is ready to receive funds, you must initiate the rollover by contacting your 401(k) plan administrator. For international expats residing outside the US, it is crucial to execute a direct rollover—transferring funds directly from the 401(k) plan to the receiving institution without the funds passing through your possession—to avoid costly compliance issues and potential tax liabilities.

If an expat were to receive the funds personally (an indirect rollover), the IRS would mandate automatic 20% or 30% withholding tax on the distributed amount, depending on the expat’s tax residency. Moreover, the individual would have only 60 days to redeposit the full gross amount—including the withheld amount—into a qualified plan or IRA to avoid permanent taxation and early withdrawal penalties.

Given the complexities of cross-border tax regulations and the heightened risk of administrative errors when managing distributions internationally, a direct rollover eliminates the risk of triggering an unexpected US tax liability, prevents unnecessary withholding, and ensures seamless regulatory compliance across jurisdictions.

Are There Alternatives to Rolling Over a 401(k) to an Annuity?

While rolling over a 401(k) to an annuity can offer valuable income guarantees for international expats, it is not the only rollover option. Depending on your retirement goals and cross-border tax considerations, the following alternatives may be more appropriate:

1. Rolling over to an IRA
2. Transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS)
3. Cashing out your 401(k)

Rolling Over to an IRA

For most expats, transferring a 401(k) into an IRA represents the most flexible and advantageous alternative, offering benefits such as:

• Flexible investment options: Unlike 401(k) plans, IRAs provide access to a broader range of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This expanded selection allows for more strategic diversification aligned with your specific financial objectives and risk tolerance.
• Consolidation of US retirement funds: Many expats accumulate multiple 401(k) accounts across different employers. Consolidating these accounts into a single IRA simplifies asset management, reduces administrative burdens, and minimises the duplication of account maintenance and fund management fees.
• Tax efficiency: A direct rollover of a 401(k) to an IRA enables retirement assets to continue growing on a tax-deferred basis (traditional IRA) or tax-free basis (Roth IRA), preserving the tax-advantaged status of your retirement savings.

Transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS)

A QROPS is a UK-recognised pension transfer scheme, allowing individuals to move eligible UK pension funds overseas without incurring UK tax charges.

US 401(k) assets cannot be transferred into a QROPS because the IRS does not recognise these schemes as qualified retirement plans. Attempting such a transfer can result in immediate US income taxation, early withdrawal penalties, and potential UK tax exposure.

As a result, QROPS is not a legitimate or compliant route for managing US-based retirement assets.

401(k) plans cannot be transferred into QROPS structures due to fundamental differences in regulatory frameworks and tax treatment. Attempting such a transfer would likely trigger adverse tax consequences in both jurisdictions.

Therefore, QROPS is not a legitimate or advisable solution for managing 401(k) assets held by British or international expats retiring in the UK.

Cashing Out Your 401(k)

While cashing out a 401(k) may seem appealing for immediate liquidity, it is generally ill-advised for several reasons:

• Immediate taxation: A full distribution of your 401(k) would be subject to US income tax in the year of withdrawal. Depending on the size of the account, this could push you into a higher tax bracket, resulting in significant tax liabilities.
• Early withdrawal penalties: If you are under age 59½, an additional 10% early withdrawal penalty may apply, further eroding your retirement savings.
• Loss of growth: Cashing out eliminates the opportunity for tax-deferred or tax-free growth, significantly impairing long-term retirement security.
• Cross-border tax implications: For expats, receiving a lump sum could also complicate tax filings and reporting obligations in the US and their country of residence.

Key Takeaway

For internationally mobile individuals with legacy 401(k) balances, annuities may provide structured income but often lack the flexibility, cost-efficiency, and investment control needed for effective cross-border retirement planning.

Before proceeding with a 401(k) rollover to an annuity, expats should evaluate whether an IRA rollover—offering greater liquidity, tax-efficient growth, and broader investment access—better aligns with their objectives, especially in the context of dual tax obligations and currency risk.

A poorly structured rollover can trigger unnecessary US withholding tax, lock in high product fees, and complicate estate or succession planning. Seeking regulated, cross-border financial advice is essential to ensure compliance with IRS rules, local tax laws, and the provisions of any relevant double tax treaties (DTAs).

Titan Wealth International provides tailored, cross-jurisdictional retirement solutions to help British and international expats preserve and optimise retirement savings across borders.