Types of Annuities Explained

Annuities are long-term contracts between you and an insurance company, but "annuity" isn't one product. It's a category, and the differences between types matter. Some are built for immediate income. Others are built to grow tax-deferred for years before you touch them. Choosing the wrong type for your situation can mean the wrong kind of liquidity, the wrong kind of growth, or paying for features you don't need.

Here's how three of the most common types compare.

A Few Things All Annuities Share

Before getting into the differences, a few features apply across most annuity contracts:

• Tax deferral. Annuity funds and their growth are taxed only upon withdrawal, at ordinary income rates. Withdrawals before age 59½ may incur an additional 10% federal penalty.
• Probate avoidance. With a properly named beneficiary, annuities typically bypass the probate process.
• Fees and surrender charges. All annuities involve fees, and most carry potential surrender penalties for early withdrawal.
• Funding flexibility. Annuities can be funded with after-tax dollars or as part of a qualified retirement plan.

Single Premium Immediate Annuities (SPIAs)

A single premium immediate annuity converts a lump sum (often from a 401(k) or other savings) into an immediate, permanent stream of income. You choose the payment frequency (monthly, quarterly, semi-annually, or annually) and the structure: income for your lifetime only, joint income for you and a spouse, or a structured payment period that can extend to beneficiaries.

Key Advantages

• Guaranteed income, often beginning within a month of signing, subject to the terms of the contract.
• May allow you to defer taxes on part of your retirement savings.
• Customizable payout options to fit your goals.

Things to Know

• SPIAs are typically illiquid. Once the contract is issued, it's set. Getting out early usually isn't an option without giving up income.
• Without a selected payment period or optional rider, heirs are unlikely to receive a death benefit.
• This is an income product, not a growth product.

Multi-Year Guarantee Annuities (MYGAs)

A MYGA is designed to avoid market volatility while growing tax-deferred. You purchase with a single premium, and the carrier pays a fixed interest rate for a set period, usually one to ten years. At the end of that period, you can renew at a new declared rate, annuitize the funds into an income stream, or withdraw the money.

MYGAs are fixed annuities, but not all fixed annuities are MYGAs. The distinction is how the interest is calculated and how long the rate is actually guaranteed.

Key Advantages

• A fixed, predictable interest rate for the guarantee period.
• No exposure to market fluctuations or investment losses on the guaranteed portion, subject to the terms and claims-paying ability of the issuing carrier.
• Tax-deferred growth until withdrawal.
• Remaining assets can pass to beneficiaries.

Things to Know

• Minimum premium amounts vary by product and carrier.
• Early withdrawal or surrender typically triggers a penalty.
• Some contracts include a Market Value Adjustment (MVA), which can increase or decrease your accumulated value on a full or partial surrender during the surrender charge period.
• Growth potential is generally lower than stocks or mutual funds.

Fixed Indexed Annuities (FIAs)

A fixed indexed annuity is a fixed annuity that calculates interest differently. Rather than a flat declared rate, an FIA tracks a selected market index (such as the S&P 500) and credits interest tied to that index's performance, typically on each contract anniversary. Principal is protected from index-linked losses: if the index falls, the worst outcome is zero interest credited that year, subject to the terms and guarantees of the issuing carrier. If the index rises, you receive a portion of that growth as indexed interest, subject to limits the carrier sets, commonly caps, spreads, or participation rates.

Key Advantages

• Principal protected from market volatility, subject to the terms and claims-paying ability of the issuing carrier.
• Some contracts offer optional riders (guaranteed income, single or joint life options), though these may carry additional annual fees.
• Tax-deferred growth.

Things to Know

• Interest credits aren't guaranteed and depend on index performance, cap rates, and participation rates, which can change year to year.
• Inflation can erode buying power over time even with index-linked growth.
• FIAs carry a surrender charge period: a set number of years during which early withdrawals beyond any free withdrawal provision may trigger penalties.

Which One Fits?

There's no universal answer. It depends on when you need income, how much liquidity you require, and how much market-linked growth potential matters to your plan. A SPIA solves for immediate income. A MYGA solves for a simple, predictable rate over a defined period. An FIA solves for tax-deferred growth potential with principal protection built in.

The right move is reviewing the actual terms, conditions, time periods, and contract options against your specific retirement strategy, not picking a product off a list.