Types of Annuities: A Complete Guide
Fixed, fixed indexed, variable, immediate, deferred, MYGA, and QLAC annuities, explained in plain language with real-world examples and how to tell them apart.
What is an annuity?
An annuity is a contract with an insurance company. You pay a lump sum or a series of payments, and in exchange, the insurer promises to pay you income, either right away or starting at a future date, for a set period or for the rest of your life. Annuities exist to solve a problem no other retirement account solves on its own: outliving your savings. A 401(k) or IRA has no built-in mechanism guaranteeing it won't run out. An annuity can convert a pool of savings into income that continues on a schedule you can't outlive, backed by the issuing insurer's financial strength and claims-paying ability.
Every annuity falls into one of a few core categories, and most of what separates them comes down to two questions: does your money grow with market performance, and does your income start now or later. This guide walks through each type, how it actually works, a hypothetical example, and where it tends to fit.
Two phases: accumulation and payout
Most annuities move through two phases. During the accumulation phase, your money grows, either at a fixed rate, an index-linked rate, or based on market performance, and that growth is tax-deferred. During the payout phase, the contract converts into income, either through annuitization, which exchanges the account balance for a fixed stream of payments, or by activating an income rider, which allows guaranteed lifetime withdrawals while you retain access to the remaining account value. Immediate annuities skip the accumulation phase entirely and move straight to payout.
Two ways to fund one, taxed differently
A qualified annuity is purchased with pre-tax retirement money, an IRA or 401(k) rollover, and every dollar withdrawn is taxed as ordinary income, the same as any other qualified account. A non-qualified annuity is purchased with after-tax savings, so only the earnings portion of each withdrawal is taxable; the portion that represents your original contribution comes back tax-free. The type of annuity (fixed, indexed, variable, immediate) and how it's funded (qualified or non-qualified) are two separate decisions.
How the main types compare
A high-level comparison. Every contract is different, so treat this as a starting point for a conversation, not a final answer.
| Type | Market Risk | Growth | Lifetime Income | Liquidity |
|---|---|---|---|---|
| Fixed | None | Fixed rate | Optional rider | Limited during term |
| Fixed Indexed | None (index-linked) | Capped, index-linked | Optional rider | Limited during term |
| Variable | Full | Uncapped, market-based | Optional rider | Limited during term |
| Immediate (SPIA) | None | None (income only) | Built in, starts now | Very low once annuitized |
| Deferred Income / QLAC | None | None (income only) | Built in, starts later | Very low until income date |
| MYGA | None | Fixed rate, locked term | Optional rider | Limited during term |
Fixed Annuities
A fixed annuity pays a guaranteed, fixed interest rate declared by the insurer, similar in concept to a CD, but issued by an insurance company rather than a bank.
You deposit a lump sum, and the insurer credits a set interest rate for a defined period, regardless of what happens in the stock market. Growth is tax-deferred until you withdraw it, and most contracts allow a limited annual withdrawal (commonly 10% of the balance) without triggering a surrender charge.
Hypothetical Example
A 62-year-old deposits $100,000 into a fixed annuity guaranteeing 4.5% annually. Left to compound for five years with no withdrawals, the contract value would grow to roughly $124,600. Actual rates, terms, and results vary by contract and issuer, and this figure is for illustration only.
Potential Advantages
- —Predictable, guaranteed growth regardless of market performance
- —Principal is protected from market loss
- —Tax-deferred growth until withdrawal
- —Simple, easy-to-understand structure
Trade-Offs to Weigh
- —Lower growth ceiling than market-linked options
- —Surrender charges apply to withdrawals beyond the free amount during the surrender period
- —A fixed rate may not keep pace with inflation over time
Fixed Indexed Annuities (FIAs)
A fixed indexed annuity credits interest based in part on the performance of a market index, such as the S&P 500, without directly investing in the market. Principal is protected from index losses.
The insurer uses a formula, commonly a cap rate, participation rate, or spread, to determine how much of the index's gain gets credited to your contract. If the index rises and your cap rate is 6%, you're credited up to 6%, even if the index gained more. If the index falls, most contracts credit 0% for that period rather than a loss, protecting your principal from the downturn.
Hypothetical Example
A hypothetical $150,000 FIA with a 6% annual cap: if the index gains 10% in a given year, the contract is credited 6% ($9,000). If the index falls 8% that year, the contract is credited 0%, principal is preserved, but there's no gain either. These figures are illustrative only; actual caps and participation rates vary by contract and change over time.
Potential Advantages
- —Growth potential above a standard fixed annuity
- —Principal is protected from market downturns
- —Tax-deferred growth
- —Often paired with an income rider for guaranteed lifetime withdrawals
Trade-Offs to Weigh
- —Caps, participation rates, or spreads limit how much of a market gain you actually receive
- —Crediting formulas can be complex and vary significantly between contracts
- —Surrender charges apply during the surrender period
- —Optional riders carry an additional annual fee
Variable Annuities
A variable annuity allocates your money to investment sub-accounts, similar in structure to mutual funds, so the contract's value moves up or down with the performance of those underlying investments.
Unlike fixed or indexed annuities, principal is not protected from investment loss unless you've purchased a specific guarantee rider (at an additional cost). Growth potential mirrors the underlying sub-accounts you select, minus the contract's fees, which are typically higher than other annuity types because they include fund expenses on top of insurance charges.
Hypothetical Example
A hypothetical $150,000 allocated across equity and bond sub-accounts: if those sub-accounts return 8% in a given year, the contract value grows by roughly that amount, minus fees. If the sub-accounts decline 8%, the contract value falls by a comparable amount, minus any protection rider in place. Illustrative only.
Potential Advantages
- —The highest growth potential among annuity types
- —Broad choice of underlying investment sub-accounts
- —Tax-deferred growth
- —Optional living or death benefit riders available for an added cost
Trade-Offs to Weigh
- —Principal is at risk and can decline in value
- —Typically the highest fee structure of any annuity type (mortality & expense charges, fund expenses, rider fees)
- —The most complex contract structure to evaluate
- —Still subject to surrender charges during the surrender period
Immediate Annuities (SPIA)
A Single Premium Immediate Annuity (SPIA) exchanges a lump sum today for income that begins almost immediately, typically within 30 days to 12 months of purchase.
There's no accumulation phase. The insurer calculates a periodic payment based on the premium amount, your age, and the payout option you select, life only, period certain, or joint life with a spouse. Once annuitized, the decision generally can't be reversed in exchange for the lump sum back.
Hypothetical Example
A 70-year-old deposits $200,000 into a SPIA structured for life-only monthly income. Depending on current interest rates and the payout option selected, a contract like this might pay in the range of $1,300 to $1,500 per month for life. This is an illustrative range, not a quote, actual payments depend on the insurer, current rates, and the specific contract.
Potential Advantages
- —Income begins almost immediately
- —Often the highest guaranteed payout rate for a given premium among lifetime-income options at a given age
- —Simple, transparent structure
- —Removes both market risk and longevity risk entirely for the income purchased
Trade-Offs to Weigh
- —Generally irreversible once annuitized, you give up access to the lump sum
- —No market growth potential
- —Payments typically don't adjust for inflation unless an inflation rider is added
- —A life-only payout stops entirely at death unless a period-certain or joint option is selected, which lowers the payment
Deferred Income Annuities & QLACs
A Deferred Income Annuity (DIA) works like a SPIA, except income starts at a future date you choose, often 10 to 20+ years out, rather than immediately. A Qualified Longevity Annuity Contract (QLAC) is a specific type of DIA funded with IRA or 401(k) money that receives special IRS treatment.
You deposit a lump sum now. Because the insurer holds it longer before paying out, the eventual monthly income is typically significantly higher than an immediate annuity would provide for the same premium at the same starting age. A QLAC lets you use up to the IRS limit ($210,000 as of 2025, indexed for inflation) of qualified retirement funds to purchase this future income, and that amount is excluded from Required Minimum Distribution calculations until income begins, which can be as late as age 85.
Hypothetical Example
A 60-year-old deposits $100,000 into a QLAC set to begin income at age 80. Because the insurer holds the funds for 20 years before paying out, the eventual monthly payment could be meaningfully higher than what a SPIA purchased at 60 with the same $100,000 would pay starting immediately. Actual amounts depend on current rates and the specific contract; this example is illustrative only.
Potential Advantages
- —Directly solves for longevity risk, running out of income very late in retirement
- —A QLAC can reduce Required Minimum Distributions in the years before income begins
- —Generally the most efficient way to buy a large amount of guaranteed late-life income for a given premium
Trade-Offs to Weigh
- —Funds are illiquid and inaccessible until the deferred income date
- —Income doesn't begin for years, sometimes decades
- —If the annuitant dies before the income start date, some or all of the premium may be forfeited depending on the death-benefit option chosen
Multi-Year Guaranteed Annuities (MYGAs)
A Multi-Year Guaranteed Annuity is a type of fixed annuity that locks in a specific interest rate for a stated multi-year term, commonly 3, 5, 7, or 10 years, functioning much like a bank CD.
The rate is guaranteed for the entire term. At the end of the term, you can renew into a new rate, move the funds to another annuity through a tax-free 1035 exchange, or withdraw the funds, with any gain taxed as ordinary income. Most MYGAs carry no ongoing account fees.
Hypothetical Example
A hypothetical $75,000 deposit into a 5-year MYGA guaranteeing 5% annually would grow to roughly $95,700 by the end of the term if left untouched. Illustrative only; actual rates vary by term, issuer, and current market conditions.
Potential Advantages
- —Rate certainty for the entire term, no surprises
- —Often simpler and higher-yielding than a standard fixed annuity
- —Typically no ongoing account fees
- —A useful alternative to a CD for money not needed during the term
Trade-Offs to Weigh
- —Withdrawals beyond the free-withdrawal allowance during the term trigger a surrender charge
- —The rate is locked in, so if market rates rise afterward, you're still earning the original rate until the term ends
Riders: customizing a contract after the fact
A rider is an optional feature added to a contract, usually for an additional annual fee, that changes what it does. Riders are how a deferred annuity, fixed, indexed, or variable, can provide guaranteed lifetime income without you giving up access to the account, or how a lump-sum annuity can still leave something for a beneficiary.
Income Rider (GLWB)
Short for Guaranteed Lifetime Withdrawal Benefit. Lets you take guaranteed income withdrawals for life from a deferred annuity without fully annuitizing, so you keep access to the remaining account value. Typically costs an annual fee of roughly 0.5% to 1.5% of the benefit base.
Death Benefit Rider
Ensures a named beneficiary receives at least the remaining account value, or a stepped-up amount, if the annuitant dies. Especially relevant on immediate annuities, where a "life only" payout otherwise leaves nothing for heirs.
Enhanced/LTC Rider
Some contracts increase the withdrawal amount if the owner needs qualifying long-term care, effectively using the annuity to self-insure a portion of that risk.
The right type follows the goal, not the other way around
The types above aren't ranked; each solves a different problem. The starting point is the same one we use for every retirement review: your goals, income needs, liquidity needs, time horizon, and risk tolerance.
What a contract can cost, beyond the premium
Fixed annuities and MYGAs typically carry no ongoing account fees; the cost shows up as a lower rate relative to a riskier product, and as a surrender charge if you withdraw early. Variable annuities generally carry the highest total costs: mortality & expense (M&E) charges, underlying fund expenses, and rider fees layered on top of each other. Indexed annuities usually charge no explicit fee unless a rider is added, with the cost instead reflected in the cap, participation rate, or spread. Nearly every deferred annuity also carries a surrender charge schedule, commonly starting between 7% and 10% and declining to zero over 3 to 10 years, and some apply a market value adjustment (MVA) that can increase or decrease a surrender charge based on interest rate movement since purchase.
Deferred growth, taxed on the way out
Growth inside any annuity is tax-deferred under Internal Revenue Code Section 72 until withdrawn. From there, taxation depends on how the annuity was funded. A non-qualified annuity, funded with after-tax savings, taxes only the earnings portion of each withdrawal; the portion representing your original contribution returns tax-free. A qualified annuity, funded with IRA or 401(k) dollars, is fully taxable as ordinary income on withdrawal, the same as any other qualified account. Withdrawals before age 59½ can also trigger a 10% federal early-withdrawal penalty on the taxable portion, with limited exceptions. Holding an annuity inside an IRA doesn't provide any additional tax deferral beyond what the IRA already provides; the reason to do so is the annuity's insurance features, not extra tax benefits.
Common questions about annuity types
What is the difference between a fixed annuity and a variable annuity?
A fixed annuity credits a guaranteed interest rate set by the insurer, so principal isn't exposed to market loss. A variable annuity allocates your money to investment sub-accounts, similar to mutual funds, so its value can rise or fall with the market and principal is not protected unless you've purchased a specific guarantee rider.
Can you lose money in an annuity?
It depends on the type. Fixed, fixed indexed, and MYGA annuities protect principal from market loss, though early withdrawals beyond the contract's free-withdrawal allowance can trigger surrender charges that reduce your balance. Variable annuities can lose value if the underlying investments decline, unless a specific protection rider has been added.
What is a surrender charge?
A surrender charge is a fee for withdrawing more than the contract's allowed amount, or fully cashing out, before a stated surrender period ends, commonly 3 to 10 years. Charges typically start around 7 to 10% and decline each year until they reach zero at the end of the period.
What's the difference between an immediate and a deferred annuity?
An immediate annuity (SPIA) starts paying income right away, usually within 30 days to a year of purchase. A deferred annuity delays income to a future date you choose, which is often years away, and in exchange typically pays a higher eventual income for the same premium because the insurer holds the money longer before paying it out.
What is a QLAC?
A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity funded with IRA or 401(k) money that receives special IRS treatment: the amount used to buy it (up to the IRS limit, $210,000 as of 2025, indexed for inflation) is excluded from Required Minimum Distribution calculations until income begins, which can be as late as age 85.
How much income will an annuity pay me?
It depends on the premium amount, your age and gender, current interest rates, the payout option selected (life only, period certain, joint life), and how long the insurer holds the money before paying out. There's no single industry-wide number; a complimentary review is the way to get an actual figure for your situation.
Are annuities taxed?
Growth inside an annuity is tax-deferred until withdrawn. Money withdrawn from a non-qualified annuity (funded with after-tax savings) is taxed on the earnings portion under IRS rules; money withdrawn from a qualified annuity (funded with IRA or 401(k) dollars) is generally fully taxable as ordinary income, the same as any other retirement account withdrawal. Withdrawals before age 59½ may also trigger a 10% federal penalty on the taxable portion, with limited exceptions.
Are annuities FDIC insured?
No. Annuities are insurance products, not bank deposits, so they aren't FDIC insured. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company, which is why the insurer's credit strength matters when evaluating a contract.
Does putting an annuity inside an IRA give extra tax benefits?
No. An IRA already grows tax-deferred, so holding an annuity inside one doesn't add any additional tax deferral. The reason to hold an annuity inside an IRA is for its insurance features, guaranteed income, principal protection, or index-linked growth, not for additional tax advantages.
Not sure which type fits your situation?
A complimentary retirement income and annuity review walks through your goals, income needs, liquidity needs, and time horizon, then narrows the field to what actually fits, with no obligation to move forward.
Andrew “Drew” Yurasek
Licensed Insurance Producer | Retirement & Annuity Specialist
Illinois Insurance Producer License #16233735
Annuities · Retirement Income · Insurance Solutions
Examples in this guide are hypothetical and provided for illustration only; they are not quotes, offers, or guarantees, and actual rates, caps, fees, and payouts vary by contract, insurer, and current interest rates. Annuities are insurance products and are not appropriate for everyone. Guarantees are subject to the terms of the applicable contract and the financial strength and claims-paying ability of the issuing insurance company. Withdrawals may be subject to surrender charges, taxes, market value adjustments where applicable, and additional federal tax penalties in certain circumstances. Annuities held within qualified retirement accounts such as IRAs do not provide additional tax deferral beyond that already provided by the qualified account. The Complete Investor and its representatives do not provide tax or legal advice.