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What Is a Fixed Annuity?

A fixed annuity is a tax-deferred retirement savings vehicle that provides fixed asset accumulation, much like a CD. With a fixed annuity, you can invest your savings over a specified time horizon (typically 3 to 10 years), earning a fixed return. The interest earned in your fixed annuity is not taxed until withdrawn, and your principal is guaranteed.

Tip: You might hear this product referred to using a few different names:

  • Fixed annuity
  • Fixed deferred annuity (FDA)
  • Fixed rate annuity
  • Multi-year guaranteed annuity (MYGA)
  • CD-like annuity
  • Single premium deferred annuity (SPDA)

Because annuity terminology – and the fact that a fixed annuity is an annuity in the first place – is confusing, let’s break it down:

A fixed annuity is… an annuity.

An annuity is an insurance vehicle where a lump-sum amount is exchanged for a stream of payments going forward. What makes a fixed annuity an annuity is that it has the option to annuitize at the end of the contract term. You can also choose to leave your money invested at a renewable rate, withdraw all or a portion, or roll it over into a new fixed annuity. The distinction of being an annuity gives it tax-deferred status.

More specifically, a fixed annuity is… an accumulation annuity.

An accumulation annuity is bought for the growth potential of the money invested. During the accumulation, or deferral, period your money will be invested with an insurance company and grow on a tax-deferred basis. You will have some access to your money – typically the interest or 10% of your balance – while it’s invested. Accumulation annuities grow either at a fixed rate (like fixed annuities) or grow based on market performance (as with variable and indexed annuities).

And finally, a fixed annuity is… a multi-year guaranteed accumulation annuity.

Fixed annuities earn a fixed rate over a multi-year time horizon. The interest rate will be specified upfront and will vary based on the amount you’re investing, your investment horizon, the credit rating of the insurer, and market conditions at the time of purchase. At the end of the guarantee period, the rate may change.

In summary, a fixed annuity is an annuity that operates much like a CD, offering low-risk tax-deferred accumulation at a fixed rate.

Fixed Annuity FAQs

What is an annuity?

An annuity is a form of insurance that protects your longevity. When you purchase an annuity you pay an insurance company, who invests your money, and promises to pay you a fixed and guaranteed amount of income starting on a future predetermined date and continuing for the rest of your life.

What are the different types of annuities?

What makes an annuity an annuity is its ability to provide guaranteed, lifelong income in retirement. Some annuities exist to do only that, while others have that as just an option. There are three types of income annuities:

  1. Immediate annuity (provides guaranteed, lifelong income starting 1-12 months after purchase)
  2. Longevity annuity (provides guaranteed, lifelong income starting 2-40 years after purchase)
  3. Qualified Longevity Annuity Contract or QLAC (a longevity annuity purchased with IRA funds starting after age 70½ The other type (has the option but not requirement) to provide income is known as a deferred annuity. There are three types of deferred annuities:
  1. Fixed annuity or multi-year guaranteed annuity (like a CD, it provides a guaranteed rate of return for a fixed number of years)
  2. Fixed indexed annuity (investment product that tracks market indices with limits on how much you can gain/lose)
  3. Variable annuity (investment product using mutual funds with limits on how much you can gain/lose)
What is a fixed annuity?

A fixed annuity, also known as a multi-year guaranteed annuity (MYGA), provides a guaranteed rate of return for a predetermined period of time. It is most similar to a Certificate of Deposit (CD) that is offered by a bank or other-FDIC insured institution, except that it is offered by an insurance company. When compared to CDs, fixed annuities offer higher guaranteed crediting rates over longer time horizons (3-10 years), tax-deferred growth, the ability to annuitize upon maturity, and liquidity via penalty-free partial withdrawals for those 59½ or over.

Fixed Annuities vs. CDs

Fixed annuities operate very similarly to CDs. Both vehicles offer a safe way to save money, crediting higher interest rates than available through savings accounts by requiring you to lock your money away for a period of time. However, fixed annuities have longer-term investment horizons and tax-preferential treatment, making them a better choice for retirement savings. As CDs are the more well known of the two products, it can be easier to understand fixed annuities using a side-by-side comparison:

Insurance Companies Banks
$25,000 – $3,000,000 Virtually any denomination
3 years - 10 years 3 months - 10 years
Vary by investment term and size, but typically higher than CD rates Vary by investment term and size, but typically lower than fixed annuity rates
Taxes on interest gains are deferred until money is withdrawn Interest gains are taxable annually as they are earned
Typically, a portion of the account balance is available for withdrawal annually Generally no (free) access to account balance is available
Can generally withdraw accumulated interest or 10-15% of cash value for free if aged-59½ or older All withdrawals are charged, typically equal to a portion of the interest you’ve earned
Backed primarily by the issuing insurance company, and additionally by State Guaranty Funds CDs are insured by the FDIC (up to $250,000 total per bank)
Asset passed directly to beneficiary without going through the probate process Probate process required to pass asset to heirs

Does not cover all products or all companies. Specific information available by product upon request.

Another key difference is that fixed annuities can be annuitized at the end of the contract term. Annuitization is the process of turning a lump-sum of savings into a stream of steady income, guaranteed to last a number of years or for life. This feature is what makes annuities good for retirement income and qualifies them for tax-preferential treatment.

Who Is a Fixed Annuity Right for?

Just like with any product, fixed annuities might make sense for you, or they might not. We’ve compiled a checklist to help you figure out whether a fixed annuity fits your investment needs.

Consider buying a fixed annuity if…

  • You have money to invest for at least 3 years but want access to it within 10 years
  • The money you’re investing is earmarked for retirement or to be passed on to heirs
  • You’ve already maxed out your IRA or 401(k) contributions
  • You want greater certainty and principal protection
  • You have other assets in the market exposed to higher expected returns
  • You want to preserve some liquidity

A fixed annuity is probably not the right product for you if…

  • You need to access your money within 3 years or before age 59½
  • You aren’t maxing out IRA or 401(k) contributions
  • You’re interested in high risk investments and willing to risk principal to achieve it

Fixed Annuity Pros & Cons

Fixed annuities are a useful tool for retirement savings. They provide a safe, tax-advantaged way to earn a good return on savings needed in the near future. They are very similar to CDs, with added benefits:

Guaranteed, Strong Return

The money you invest in a fixed annuity will accumulate at a fixed rate, which is specified upfront and guaranteed for the entire contract. Fixed annuities generally offer higher rates than CDs with the same contract length.

Tax-Deferred Growth

From the government’s perspective, an annuity is a retirement savings vehicle. As such, it receives similar tax treatment as IRAs: no taxes are paid until distributions are made. For a fixed annuity, this means that interest will accumulate and compound without incurring annual taxes, as is the case for a CD.

Principal Protection

Unlike with most other investments, there is no market risk associated with a fixed annuity. Your principal is protected and guaranteed to accumulate at a fixed rate, making fixed annuities a good place to park retirement money you don’t want to risk losing.

Some Liquidity

Fixed annuities provide some liquidity, typically making interest earned or 10-15% of the contract’s cash value available penalty-free annually if you’re over 59½.

Simple & Easy to Understand

There are a lot of complex products, but a fixed annuity is one of the simple ones. Assuming you leave your money in the fixed annuity until maturity, all you need to know is (1) how long until your money is available and (2) what your return will be over that period of time. There are no hidden fees that you need to worry about.

Despite these benefits, fixed annuities are not good for everyone or for all situations. Here are some of the drawbacks:

Penalties for Withdrawals Under Age 59½

Fixed annuities are really meant to be used for retirement savings. The IRS issues a 10% penalty on gains withdrawn from a fixed annuity for account holders under age 59½ .

Fixed Annuity Rates

Fixed annuity interest rates will vary over time as market conditions change, being driven most notably by longer-term Treasury and investment grade corporate bond yields. In addition, the size of your investment, length of time you’re willing to lock away your money, and the credit rating of the carrier will impact the rate.

Understanding how the investment amount, investment term, and carrier’s credit rating drive interest rates will help you to select the fixed annuity that best suits your needs. Expect to have to think about the following:

Investment Amount: In some cases, the higher the investment amount, the higher the rate. Larger fixed annuity investments may have access to higher interest rates. A portion of the insurance company’s expenses are fixed per contract such that incremental premium can essentially be invested without costing more. Said another way, there can be potential bonuses for larger deposits. Please consult with your annuity specialist for more details.

Investment Term: The longer the contract term, the higher the rate. When an insurance company invests your funds, a longer time horizon gives them more flexibility for investing your money and weathering any market fluctuations. As is the case for bonds and other fixed income instruments, investors have the right to demand higher returns the longer their money is locked away. (Note that there may be some exceptions to this rule based on the availability of some intermediate terms, like 6, 8, and 9 years.)

Insurer’s Credit Rating: The higher the insurer’s credit rating, the lower the rate, but the safer the investment. Given that fixed annuities are not backed by the FDIC and instead by guaranty funds which vary by state, it’s an important factor to consider.

The Financial Value of a Fixed Annuity

A fixed annuity is a CD-like investment which credits a fixed interest rate over a specified period of time. On a pre-tax basis, the value of the fixed annuity is understood simply by its interest rate, or the rate at which you’ll earn a return. But, fixed annuities are even more valuable on an after-tax basis. Unlike CDs, interest earned on a fixed annuity is not taxed until money is withdrawn from the contract. This not only means lower taxable income for you during the accumulation period, but also additional compounded interest.

Fixed Annuity Taxation

In our discussion of fixed annuities thus far, we’ve assumed that the purchase was made with after-tax personal savings. However, it’s also possible to buy a fixed annuity with qualified funds, such as within an IRA. In this case, the fixed annuity doesn’t provide any additional tax benefits beyond what the IRA offers, which is tax-deferral of gains until money is withdrawn.

Continuing with the original assumption that the fixed annuity is being purchased with non-qualified funds, let’s dig deeper into the tax treatment at each phase of the contract:

  • There are no taxes due during the contract term. Your money isn’t subject to taxation while it’s growing. Not paying taxes means that you’re able to keep more money invested and earning interest. And, this benefit continues as long as you keep your money in the contract, which can be beyond maturity.
  • Instead, you pay taxes once money is withdrawn whether during, at the end of, or after maturity of the contract. Assuming the fixed annuity was purchased with after-tax savings, only the interest gain portion of your withdrawal will be taxable at ordinary income rates. (If your fixed annuity is held in an IRA, all withdrawals will be taxable.) Waiting until you’re in retirement, or in a lower tax bracket, to withdraw can reduce the taxes you owe. Note that you will incur penalties if you withdraw money before age 59½ or more than what’s allowed in your contract.
  • You can continue your tax-deferral by rolling over your fixed annuity into a new annuity. When your fixed annuity matures, you’re not obligated to withdraw your funds. You can choose to roll it over into another fixed annuity or a different type of annuity through a tax-free 1035 exchange.

Tax treatment of these payments can be tricky, so be sure to reach out to a tax advisor for a complete explanation.

Fixed Annuity Portfolio Strategies

Investment decisions should not be made individually or in isolation. Instead, consider your entire financial portfolio and situation when investing. Here are some ways to think about a fixed annuity fitting into your portfolio strategy.


When diversifying your retirement portfolio, you will likely select a combination of equities and bonds that’s appropriate for both your risk-appetite and your age/investment horizon. As a fixed income investment, fixed annuities have a place in any well-diversified portfolio. Consider your fixed annuity purchase as portion of your assets you’d otherwise have allocated to bonds.


Breaking up your purchase into multiple fixed annuities with different contract terms is a useful strategy in a low interest rate environment. A fixed annuity laddering strategy accomplishes two things: you’re able to secure a higher interest rate today that’s only available for longer time commitments while also creating multiple opportunities to reinvest at potentially higher future rates. For example, instead of buying one 5-year fixed annuity, you could buy 3 fixed annuities with maturities of 3-years, 5-years, and 7-years. The money locked in for longer will be eligible for higher rates today. And, you’ll have liquidity available at multiple dates in the future, which makes it more likely that you’ll catch rising rates.

Fixed Annuity Terminology & Options

Fixed annuities are relatively simple investments, but there’s still some terminology, features, and options that you’ll need to understand. We’ve outlined some key concepts for you here.

Interest Rates

When you buy a fixed annuity, you are locking in a return that’s guaranteed for the contract term. The fixed annuity could be structured to offer the same crediting rate every year or a different rate in the first year, which is higher than in subsequent years. Ultimately, and assuming you won’t be cashing out early, what matters is the yield to maturity/surrender, or the annual effective return you’re earning over the full locked-in period. Finally, at the end of the contract, you’ll have the option for continue the fixed annuity with an annually renewable rate. Here’s how the rates will be identified:

  • Base Rate: annual interest rate credited to your account during the contract term
  • Additional First Year Interest Rate Bonus: additional interest rate that might be added to the base rate in the first year
  • Yield To Surrender/Maturity: the effective annual interest rate when spreading the bonus rate evenly over every year
  • Renewal Rate: after the contract term ends, your money will continue to earn interest at the prevailing renewal rate, which moves according to market conditions
  • Guaranteed Minimum Renewal Rate: the lowest renewal rate possible (floor) Surrender/Contract/Guarantee Period & Rates

The contract term for a fixed annuity is actually the period during which surrender charges apply. During these years, if you withdraw more than what’s allowed – typically 10% of your account value – fees will be assessed. Most fixed annuities have pre-set declining surrender charge schedule which can start as high as 10% in the first year and will then decline by typically 1% per year. Here’s how the surrender charge period will be identified:

  • Surrender Charge Period: years during which you’ll be charged to access anything greater than the free withdrawal
  • Surrender Charges: Rates applied to amount surrendered above free allowance for each year of the surrender charge period

Note that typically the surrender charge period will be the same as the rate guarantee period, but products are occasionally structured to have a longer surrender charge period. In this case, the guaranteed rate will be in effect for only a few years, after which you’ll earn the renewal rate until the surrender charge period ends. This option could make sense if you expect interest rates to increase, but it’s generally not something we’d recommend.

Free Withdrawals

Fixed annuities typically allow you to access a portion of your money penalty-free. The allowance will differ from carrier to carrier, but it’s often cumulative interest or 10% of the account balance. You should only plan to take advantage of these withdrawals if you’re at least 59½, as the IRS imposes a 10% penalty on withdrawals made before you reach that age.

Note that if your fixed annuity is qualified and was purchased within a 401(k) or IRA, any applicable required minimum distributions will be withdrawable penalty-free.

Market Value Adjustment vs. Book Value

There are two types of fixed annuities: those with a market value adjustment (MVA) or without, known as book value (BV). The MVA or BV classifications only impact you if you decide to withdraw funds early. In the case of a book value fixed annuity, the amount you’re able to withdraw will simply be the account value less surrender charges described above. However, a fixed annuity with a market value adjustment could reduce the amount you’re able to access upon surrender.

The market value adjustment will, as the name suggests, adjust the amount you’re able to surrender based on market conditions at that time. If interest rates have gone up since purchase, an additional fee will be assessed that lowers the withdrawal value. The reverse is also true. If interest rates have gone down since purchase, the amount you’re able to withdraw will actually increase.

While seemingly bizarre, fixed annuities with MVAs are actually very common and well-liked, offering higher interest rates than their BV counterparts. The market value adjustment protects the insurance company from adverse behavior by charging you for surrendering in a rising rate environment. That’s because the insurance company would otherwise lose money liquidating assets to fund your surrender (bond prices go down when interest rates go up). Having this downside protection means they can offer you a higher rate.