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Annuities
Annuities: the complete guide
How annuities protect savings and create income, what they cost, and when they make sense.
Short answer: an annuity is a contract with an insurance company. You deposit money, it grows tax-deferred, and later it can pay you income for a set period or for life. Fixed and fixed indexed annuities protect your principal from market losses.
How an annuity works
- Fund it with a lump sum, a 401(k) or IRA rollover, or a series of deposits.
- Accumulate: the money earns interest, tax-deferred, while it stays in the contract.
- Use it: withdraw money, turn it into lifetime income, or pass it to beneficiaries.
Types of annuities
| Type | How it earns | Best for |
|---|---|---|
| Fixed (MYGA) | A guaranteed rate for 2–10 years | CD-style safety with tax deferral |
| Fixed indexed (FIA) | Interest linked to an index, with a cap and a 0% floor | Growth potential with no market losses |
| Immediate income (SPIA) | Converts a lump sum into income starting right away | Retirees who want a paycheck now |
| Deferred income (DIA) | Income that starts at a future date | Planning for later-life income |
Variable annuities invest in market subaccounts and require a securities license; we do not offer them. See annuity types compared.
Lifetime income riders
Many fixed indexed annuities offer an income rider. It creates a guaranteed income amount you can start later, payable for life, even if the account value runs out. Riders usually carry an annual fee.
Agent tip: Compare annuities on the income they guarantee at your planned start age, not on the headline "roll-up" rate.
Surrender charges and liquidity
- Most annuities have a surrender period of 3 to 10 years.
- You can usually withdraw about 10% per year without a surrender charge.
- Larger withdrawals during the surrender period are charged a declining fee.
- Many contracts waive charges for nursing home stays or terminal illness.
- Keep an emergency fund outside the annuity.
Taxes
- Growth is tax-deferred until you withdraw.
- Withdrawals of gains are taxed as ordinary income, not capital gains.
- Withdrawals before age 59½ may face a 10% IRS penalty, with some exceptions.
- Annuities funded with IRA or 401(k) money follow required minimum distribution rules.
- A Section 1035 exchange can move one annuity to another without current tax.
This is general information, not tax advice.
How safe annuities are
Guarantees are backed by the claims-paying ability of the issuing insurer. That is why carrier strength matters. We look at independent financial strength ratings, such as AM Best. Each state also has a life and health insurance guaranty association that provides protection up to state limits if an insurer fails.
Who should consider an annuity
| Good fit | Probably not a fit |
|---|---|
| Within 10–15 years of retirement | Needs the money within a few years |
| Wants to protect savings from market drops | Comfortable with full market risk for higher growth |
| Wants guaranteed income beyond Social Security | Has no emergency fund |
| Rolling over a 401(k) from a former employer | Already has enough guaranteed income |
Annuity vs. CD
| Fixed annuity (MYGA) | Bank CD | |
|---|---|---|
| Rate | Guaranteed for the term | Guaranteed for the term |
| Taxes on interest | Deferred until withdrawn | Taxed every year |
| Backed by | Insurer and state guaranty association | FDIC up to limits |
| Early access | Free withdrawal amount, then surrender charge | Early withdrawal penalty |
Rolling over a 401(k)
A direct rollover moves money from a 401(k) or IRA into a qualified annuity without taxes or penalties. Read the 401(k) rollover guide.
Annuities: common questions
What is the minimum to buy an annuity?
Minimums vary by carrier and product, commonly from $5,000 to $25,000 for many fixed and fixed indexed annuities.
Can I lose money in a fixed indexed annuity?
Index losses are not credited because of the 0% floor. You can lose money by surrendering early, through surrender charges, or through optional rider fees.
What happens to my annuity when I die?
Your beneficiaries receive the remaining value or a death benefit, depending on the contract and any income option you chose.
Are annuity rates going up or down?
Rates move with interest rates and change frequently. We compare current rates across carriers at the time you buy.
Can I add money to an annuity later?
Single-premium annuities accept one deposit. Flexible-premium annuities allow additional deposits.
What is the free-look period?
After delivery you have a short period, often 10 to 30 days depending on the state and product, to cancel for a refund.
Sources and further reading
- National Association of Insurance Commissioners (NAIC): consumer guides to life insurance and annuities
- Virginia State Corporation Commission, Bureau of Insurance: verify an agent's license
- AM Best: insurer financial strength ratings
- IRS: tax rules for life insurance and annuities
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