An annuity is an insurance contract that turns purchase payments into retirement income, and the choice decides who carries investment risk. A fixed annuity keeps risk with the insurer and pays set amounts, while a variable annuity keeps risk with you and moves with markets.
Steady bills call for steady income. Growth goals tolerate ups and downs. Match the contract to your need for certainty, your timeline, and your comfort with loss.
Table of Contents
- How do payments differ?
- What do fees and lock-ins cost?
- How are taxes handled?
- Which option fits your retirement plan?
How do payments differ?
The U.S. SEC describes a fixed annuity as a contract with a promised minimum rate and fixed payments for a period or for life the SEC glossary definition. Investment risk stays with the insurer under that structure. That suits a retiree covering rent, food, or other fixed costs.
The U.S. SEC explains that a variable annuity directs purchase payments to subaccounts, usually mutual funds the SEC's variable annuities page. Account value and payouts rise and fall with market performance, and owners can lose money. That suits only savers who can absorb a drop without cutting essentials.
What do fees and lock-ins cost?
The Michigan Attorney General explains that variable annuities layer mortality-and-expense, administrative, fund, and rider charges, using 1.25% a year as an M&E example the Michigan consumer alert on annuities. The same guidance describes declining surrender charges, often about 7% in year one falling to zero over 6-10 years. Early withdrawal can therefore trigger a steep charge plus loss of benefits.
List every yearly charge in dollars, not just percent. Compare contracts over five and ten years. Keep cash for emergencies outside the annuity to avoid forced surrender.
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How are taxes handled?
According to the IRS, annuity earnings grow tax-deferred and withdrawals are generally taxable the IRS tax topic on pensions and annuities. The IRS adds that taxable distributions before age 59½ face an added 10% tax unless an exception applies. Deferral helps growth while money stays in.
Taxes arrive when money comes out. SEC and IRS guidance note that buying a variable annuity inside an IRA or 401(k) adds no extra tax deferral. Use that combination only for lifetime income or death-benefit features. Otherwise keep qualified savings in lower-cost funds.
Which option fits your retirement plan?
Match risk, horizon, and income need. Under FINRA Rule 2330, a broker recommending a deferred variable annuity must have a reasonable basis, according to FINRA. That review must weigh surrender charges, new surrender periods, lost benefits, higher fees, and exchanges in the prior 36 months.
Get the prospectus, fee table, surrender schedule, and rider costs in writing. Compare total ten-year cost against your income gap. Do not sign until you can explain the worst-year payout.
- Pick fixed income when you need predictable payments for essential costs.
- Consider variable only when you can tolerate market loss and hold long enough to outlast surrender periods.
- Avoid adding a variable annuity to an IRA solely for deferral.
- Pause on any exchange that restarts surrender charges or raises fees.
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