How to Decide Between an Annuity or a 401(k)

Yes, you can borrow from your 401(k) account, although you should think hard before you do. An annuity, on the other hand, prohibits you from borrowing money from the account.

A 401(k) allows you to name a beneficiary in the case of your death. Annuity payments end at your death, unless you purchase a death benefit. Similar to a life insurance policy, the death benefit pays to your designated heirs.

If you take money out of your 401(k) before age 59 and a half, you’ll pay a 10% early withdrawal penalty on top of the income tax due on the funds withdrawn. An early withdrawal from an annuity is called a surrender charge. But the surrender charge amount gradually reduces after several years.

There are several types of annuities and one is a variable annuity. Its value grows from the performance of the underlying portfolio selected by the annuity owner. Although a variable annuity has the potential for higher returns in a market upturn, the product’s value could also plunge. With a fixed annuity, you receive a guaranteed return, making them less risky.

Contributions to a 401(k) are limited. If you are under 50, you can contribute a maximum of $20,500 in 2022. Over 50, you can make a $6,500 catch-up contribution. For matching contributions,the total allowed for an employee-employer pay-in is $61,000 per year for those under-50. If you are over 50 and add in the catch-up contribution, the limit is $67,500. No such limits apply to an annuity. You can invest as much as you want.