What Is a Fixed Annuity? A Guide to Guaranteed Interest and Liquidity

A fixed annuity is a long-term insurance contract that accumulates value according to its interest provisions and may later provide retirement income. It is not a bank CD and is not FDIC insured.

1. How Does a Fixed Annuity Work?

You pay one or more premiums to an insurer, which credits interest according to the contract. A traditional fixed annuity may offer an initial rate and subsequently adjust its renewal rate. A multi-year guaranteed annuity (MYGA) generally guarantees a fixed rate for a selected number of years.

2. What May Be Guaranteed?

Depending on the contract, guarantees may include an interest rate for a stated period, a minimum rate, minimum contract value or specified income options. They depend on contract terms and the insurer's claims-paying ability; they are not government guarantees.

3. What Happens After the Guarantee Period?

The insurer may offer a new renewal rate, provide a window to withdraw without a surrender charge, or renew the contract under its terms. The original rate may not continue. Track the end date and review the renewal provisions in advance.

4. What Is a Surrender Period?

During a surrender period, withdrawals above the amount permitted without a charge may incur surrender charges. These usually decline over time. Additional premiums can sometimes start or extend a surrender period. Consider committing only funds you can leave in the contract for the required time.

5. Is a Free Withdrawal Completely Free?

Many contracts permit a yearly withdrawal without an insurer surrender charge. A withdrawal may still reduce future interest or income benefits and may be taxable. Taxable distributions before age 59½ can also incur an additional federal tax unless an exception applies.

6. How Can a Market Value Adjustment Affect a Withdrawal?

Some annuities have a market value adjustment (MVA). During specified periods an early withdrawal or surrender can increase or decrease the amount received based on interest-rate changes and the contract formula. An MVA may apply in addition to a surrender charge.

7. How Are Annuities Taxed?

Earnings in a nonqualified annuity purchased with after-tax money generally grow tax deferred, with taxable earnings generally treated as ordinary income when distributed. An annuity inside an IRA is already subject to retirement-account tax rules and does not create an additional tax-deferral benefit. Consult a qualified tax professional about your situation.

8. How Do Fixed Annuities Differ From CDs and Bonds?

A CD is a bank product that may have FDIC coverage within applicable limits. A fixed annuity is an insurance contract that relies on the insurer. A bond is a tradable debt security whose price can change with the market; annuity value is calculated under its contractual interest, withdrawal and adjustment rules. Compare after-tax outcomes, liquidity, guarantee periods, financial strength and purpose.

9. How Can You Receive Retirement Income?

Options may include periodic withdrawals, annuitization, joint-life income or an income rider. Annuitization can be difficult to reverse; an income rider may charge fees and restrict withdrawals. Before starting income, distinguish account value, income base and actual payment amounts.

10. Who Might Consider a Fixed Annuity?

It may suit someone who values contractual principal protection, predictable interest, tax-deferred accumulation or future income and can commit funds for the long term. Those needing short-term access or high liquidity should consider the surrender restrictions carefully. Review the guarantee period, renewal rules, surrender schedule, MVA, free withdrawals, death benefit, income options and insurer strength.

This article is for general education, not legal, tax, investment or individual insurance advice. Guarantees depend on contract terms and the insurer's claims-paying ability. Costs, tax treatment and availability vary by state and individual circumstances.