Should Pastors Roll Their 403(b) into an Annuity? Stop and Consider These Risks First

Recently, I’ve talked with pastors who rolled some of their 403(b) funds into an annuity while still working. Now, they have regrets. What seemed like a great decision at the time has turned into frustration as they realize the limitations, fees, and restrictions they didn’t fully understand.

If you’re considering rolling your 403(b) into an annuity, take a moment to pause and think through the long-term implications. This post isn’t about giving personal financial advice. Every situation is different. But I want to make you aware of some major concerns before making this move.

Why Are Pastors Pushed Toward Annuities?

If you’ve left a church, retired, or are nearing that decision, chances are someone has pitched you an annuity. The sales pitch is usually the same:

✔ “Guaranteed income for life”

✔ “No market risk”

✔ “Protect your retirement savings”

But here’s what many pastors aren’t told upfront. Rolling a 403(b) into an annuity often benefits the salesperson far more than it benefits you.

These products frequently come with high fees, long surrender periods, and tax complications that pastors don’t expect. While annuities can serve a purpose in very specific cases, more often than not, they are not the best option for pastors.

What Happens When You Roll a 403(b) into an Annuity?

Many pastors assume an annuity will work just like their 403(b), but it doesn’t. Here’s why:

✅ Your 403(b) is already tax-deferred. Moving it into an annuity doesn’t add any new tax benefits. It just moves the money into a new product.

✅ Annuities often come with high fees that can significantly reduce your returns compared to low-cost investment options inside a 403(b).

✅ Surrender charges can lock up your money. Many annuities penalize you if you need to access your funds within the first five to ten years.

The Added Complications of an In-Service Rollover into an Annuity

An in-service rollover is when a pastor moves funds out of a 403(b) into an annuity while still employed. This can create unexpected financial challenges, including:

• Required Minimum Distributions (RMDs) Start Sooner – Pastors who work part-time in retirement can typically delay RMDs on money still inside an active 403(b) plan where they are making contributions. However, funds moved to an annuity are immediately subject to RMDs starting at age 73.

• Limited Flexibility – If the annuity has strict withdrawal rules, you may lose control over how and when you access your money.

The Housing Allowance Question: Can Annuities Still Qualify?

Many pastors rely on housing allowance benefits in retirement. Some annuities may still qualify for housing allowance withdrawals, but it’s not automatic.

✅ To qualify for housing allowance, the annuity must be purchased within a denominational or employer-sponsored plan. If you personally buy an annuity outside your church plan, it may not be eligible.

✅ Some annuity contracts limit how withdrawals are structured, which can complicate housing allowance claims.

✅ Once money is moved out of a 403(b), it may no longer be eligible for the same tax benefits.

When Might an Annuity Make Sense? (And Why It Still May Not Be Your Best Option)

There are very few scenarios where an annuity might be worth considering, but even in those cases, I’m not convinced they are the best option. The fees, restrictions, and loss of flexibility often outweigh the benefits. However, here are a few situations where pastors may be encouraged to explore annuities:

✔ If you truly need a guaranteed lifetime income stream and do not have a pension or Social Security benefits.

✔ If you are highly risk-averse and cannot tolerate any market fluctuation.

✔ If you have a very specific need for structured income and have no other way to create it.

Even in these cases, alternative strategies can often provide similar financial security with greater flexibility and fewer costs.

I don’t recommend annuities in most cases, and even in these scenarios, I’m not convinced they are the best option. The fees, restrictions, and loss of flexibility often outweigh the benefits. With proper planning, there are often better alternatives that provide similar financial security without the downsides of an annuity.

Are There Ways to Accomplish This Without an Annuity?

Yes. With proper planning, you can achieve similar results without the high fees and restrictions of an annuity. Here’s how:

✅ Systematic Withdrawals from a Well-Managed Portfolio – Instead of locking into an annuity, a properly diversified portfolio can generate steady income through strategic withdrawals while keeping funds accessible.

✅ A Laddered Bond or CD Strategy – Creating a bond or CD ladder can provide predictable cash flow without tying up all your assets in an annuity contract.

✅ Utilizing a 403(b) with a Stable Value or Low-Risk Option – Many 403(b) plans offer stable value funds that provide lower volatility with liquidity.

✅ Delay Social Security for Higher Guaranteed Payments – If you’re eligible, delaying Social Security can significantly increase your monthly benefit, reducing the need for an annuity.

Before locking your retirement savings into an annuity, consider these lower-cost, more flexible alternatives that provide financial security without the downsides of annuities.

What to Ask Before Rolling a 403(b) into an Annuity

❓ Will this annuity still qualify for housing allowance withdrawals in retirement?

❓ What are the total fees, including commissions and surrender charges?

❓ How long is the surrender period, and what happens if I need my money sooner?

❓ Are there lower-cost alternatives that offer similar benefits without the restrictions?

❓ Will I be forced to take RMDs earlier than expected?

Think Twice Before Making This Decision

Rolling a 403(b) into an annuity isn’t just another financial decision. It’s a major commitment that can’t easily be undone. Before making a move, take a step back, ask the hard questions, and get a second opinion.

Pastors, don’t make a long-term financial decision based on a sales pitch. An annuity might sound like a great solution now, but it could create costly limitations down the road.

If you’re considering this option, talk to a financial professional who doesn’t earn commissions on annuities. Someone who is truly looking out for your best interests, not just making a sale.

Have you been offered an annuity for your 403(b)? What concerns do you have? Drop a comment below and let’s talk about it.