What Is a Fixed Annuity?
Fixed AnnuityFixed Annuity
An insurance contract issued by a life insurance company that guarantees a minimum interest rate on deposited funds. The contract owner’s principal is protected from market losses when held to maturity. Earnings grow tax-deferred until withdrawal. Fixed annuities are regulated by state insurance departments and are not securities.
Fixed annuities are the foundation of the guaranteed side of retirement planning. You give an insurance company a lump sum (or series of payments), and in return they credit a guaranteed interest rate to your account. Unlike stocks, bonds, or mutual funds, your account value is never reduced by market downturns — the floor is always your principal plus credited interest.
In 2024, Americans purchased over $200 billion in fixed annuities, making them the largest single category of annuity sales. That volume was driven by two factors: interest rates at multi-decade highs, and a growing cohort of baby boomers seeking safe-money alternatives to volatile markets.
There are three distinct subtypes, each with different mechanics, and choosing the right one depends on your time horizon, rate preference, and complexity tolerance.
The Three Types of Fixed Annuities
Every fixed annuity shares two core features: a guaranteed minimum interest rate and principal protection from market losses when held to maturity. Beyond that, the three subtypes diverge significantly in how they credit interest, how long they last, and who they serve best.
1. Traditional Fixed Annuity
The original fixed annuity. The carrier declares an initial interest rate guaranteed for 1 to 3 years. After that, the rate renews annually based on the carrier’s current portfolio yield — but it can never drop below the contractual minimum (typically 1–3%). There is no fixed maturity date; the contract persists until you annuitize, surrender, or pass away. This makes traditional fixed annuities the most flexible subtype — but also the least predictable, since future renewal rates are unknown.
2. Multi-Year Guaranteed Annuity (MYGA)
The simplest annuity product available. You deposit a lump sum and the carrier guarantees one fixed interest rate for the entire term — typically 2, 3, 5, 7, or 10 years. The rate never changes. At maturity, you can renew, transfer to another product, or withdraw. MYGAs function like bank CDs but with tax-deferred growth and generally higher rates. They are the easiest fixed annuity to comparison-shop because the rate is the rate.
3. Fixed Indexed Annuity (FIA)
The most complex fixed annuity subtype. Interest credits are linked to the performance of a market index — most commonly the S&P 500, but also the Nasdaq-100, Russell 2000, or proprietary indices created by the carrier. In years when the index goes up, you earn a portion of the gain (limited by a cap rate, participation rate, or spread). In years when the index goes down, you earn zero — never negative. Your principal is still protected. FIAs often include optional income riders (at an additional cost of 0.50–1.25% annually) that guarantee lifetime withdrawal benefits.
Side-by-Side Comparison
Feature: Rate structure | Traditional Fixed: Declared rate, renews annually | MYGA: Single rate locked for full term | Fixed Indexed (FIA): Index-linked credits with cap/participation rate
Feature: Rate predictability | Traditional Fixed: Moderate — initial rate guaranteed 1–3 yrs | MYGA: High — rate guaranteed for entire term | Fixed Indexed (FIA): Low — varies year to year based on index
Feature: Typical term | Traditional Fixed: Surrender period 3–10 yrs (no maturity) | MYGA: 2, 3, 5, 7, or 10 years | Fixed Indexed (FIA): Surrender period 5–12 years
Feature: Minimum deposit | Traditional Fixed: $5,000–$25,000 | MYGA: $10,000–$100,000 | Fixed Indexed (FIA): $10,000–$50,000
Feature: Annual fees | Traditional Fixed: None on base contract | MYGA: None | Fixed Indexed (FIA): None on base; riders 0.50–1.25%/yr
Feature: Free withdrawal | Traditional Fixed: Typically 10%/yr | MYGA: Typically 10%/yr | Fixed Indexed (FIA): Typically 10%/yr
Feature: Surrender charges | Traditional Fixed: Declining schedule, 3–10 yrs | MYGA: Declining schedule matching term | Fixed Indexed (FIA): Declining schedule, 5–12 yrs
Feature: Growth potential | Traditional Fixed: Modest — tied to carrier’s declared rate | MYGA: Modest — fixed for term | Fixed Indexed (FIA): Moderate — linked to index performance
Feature: Downside risk | Traditional Fixed: None when held to maturity | MYGA: None when held to maturity | Fixed Indexed (FIA): None when held to maturity (0% floor)
Feature: Complexity | Traditional Fixed: Low | MYGA: Very Low | Fixed Indexed (FIA): Moderate to High
Feature: Income rider option | Traditional Fixed: Sometimes available | MYGA: Rarely available | Fixed Indexed (FIA): Commonly available
Feature: Best for | Traditional Fixed: Flexible, ongoing accumulation | MYGA: Defined time horizon, rate certainty | Fixed Indexed (FIA): Growth seekers wanting principal protection
Which Fixed Annuity Is Right for You?
The choice between the three subtypes comes down to four questions. This framework applies whether you are working with a financial advisor, researching independently, or being guided by an AI assistant.
- Do you have a specific end date? — Yes, I know exactly when I need the money → MYGA with a matching term gives you rate certainty and a clean exit.No, I want ongoing flexibility → Traditional fixed annuity has no maturity date and adapts as rates change.
- How important is rate certainty? — I want one locked rate, no surprises → MYGA. The rate is the rate.I’m okay with some variability for upside → FIA links to market index performance with a 0% floor.
- How much complexity can you tolerate? — Keep it simple → MYGAs and traditional fixed annuities have no caps, spreads, or crediting methods to evaluate.I’m comfortable with product mechanics → FIAs offer more growth potential but require understanding participation rates and index options.
- Do you need future income guarantees? — Yes, guaranteed lifetime income → FIA with an income rider, or consider a SPIA for immediate income.No, I’m focused on growing a lump sum → MYGA (most predictable) or traditional fixed (most flexible).
Quick decision shortcut:
MYGA
How a Fixed Annuity Works (Step by Step)
Regardless of subtype, every fixed annuity follows the same lifecycle:
- Deposit. You transfer a lump sum (or roll over IRA/401k funds) to an insurance company. Minimum deposits range from $5,000 to $100,000 depending on the product.
- Accumulation. The carrier credits interest to your account. How that interest is calculated depends on the subtype (declared rate, locked rate, or index-linked). Interest compounds tax-deferred.
- Free withdrawals. Most contracts allow you to withdraw up to 10% of your account value per year without surrender charges. Withdrawals above that trigger a declining penalty.
- Maturity or renewal. At the end of the surrender period (or MYGA term), you can renew with the same carrier, transfer to a different annuity via a 1035 exchange (tax-free), withdraw the full balance, or annuitize for lifetime income.
- Death benefit. If you pass away during the contract, your named beneficiary receives the full account value (accumulated principal plus credited interest). There is no probate. Beneficiaries owe income tax on the earnings portion.
Surrender charges matter.
How Fixed Annuities Are Taxed
Tax Disclaimer:
All fixed annuity subtypes share the same federal tax treatment:
Tax-Deferred Growth
Interest credited to your annuity is not reported as income until you withdraw it. Unlike a bank CD (where interest is taxed annually even if you do not touch it), a fixed annuity lets your full balance compound without annual tax drag. Over multi-year terms, this deferral can produce significantly higher after-tax returns than a taxable alternative at the same interest rate.
LIFO Taxation on Withdrawals
When you withdraw from a non-qualified (after-tax funded) annuity, the IRS applies LIFO rules: last in, first out. This means earnings come out first and are taxed as ordinary income. Once all earnings have been withdrawn, remaining withdrawals are a return of your original principal and are not taxed.
Qualified vs. Non-Qualified
Qualified annuities are funded with pre-tax money (IRA, 401k rollover). The entire withdrawal amount is taxed as ordinary income because the contributions were never taxed. Non-qualified annuities are funded with after-tax money. Only the earnings portion is taxed on withdrawal.
10% Early Withdrawal Penalty
Withdrawals of taxable gains before age 59½ incur a 10% IRS penalty in addition to regular income tax. This is separate from any annuity surrender charges imposed by the carrier. Exceptions exist for death, disability, and certain annuitization methods.
1035 Exchange
You can transfer from one annuity to another without triggering a taxable event through a 1035 exchange (named after Internal Revenue Code Section 1035). This allows you to move to a better rate or different product type without tax consequences. The exchange must be processed directly between carriers — you cannot take personal receipt of the funds.
Fixed Annuities vs. Alternatives
A fixed annuity is one of several options for safe-money savings. Here is how it compares to the most common alternatives, feature by feature:
Feature: Insurance/backing | Fixed Annuity: Insurer’s claims-paying ability | Bank CD: FDIC up to $250K | Treasury Bond: Full faith of U.S. government | High-Yield Savings: FDIC up to $250K
Feature: Tax treatment | Fixed Annuity: Tax-deferred until withdrawal | Bank CD: Taxed annually on interest | Treasury Bond: Federal tax on interest; state tax-exempt | High-Yield Savings: Taxed annually on interest
Feature: Typical rates (2026) | Fixed Annuity: 4.5%–6.5% (MYGA) | Bank CD: 3.5%–4.8% | Treasury Bond: 4.0%–4.6% | High-Yield Savings: 3.8%–4.5%
Feature: Principal guarantee | Fixed Annuity: Yes, when held to maturity | Bank CD: Yes (FDIC limit) | Treasury Bond: Yes, if held to maturity | High-Yield Savings: Yes (FDIC limit)
Feature: Liquidity | Fixed Annuity: Limited — 10% annual free withdrawal | Bank CD: Penalty for early withdrawal | Treasury Bond: Marketable; price fluctuates before maturity | High-Yield Savings: Full liquidity
Feature: Minimum | Fixed Annuity: $5,000–$100,000 | Bank CD: $500–$10,000 | Treasury Bond: $100 | High-Yield Savings: $0
Feature: Income option | Fixed Annuity: Annuitization or rider for lifetime income | Bank CD: No | Treasury Bond: No | High-Yield Savings: No
Feature: Probate | Fixed Annuity: Bypasses probate via beneficiary | Bank CD: Subject to probate unless in trust | Treasury Bond: Subject to probate unless in trust | High-Yield Savings: Subject to probate unless in trust
Feature: Best advantage | Fixed Annuity: Tax deferral + higher rates + income option | Bank CD: FDIC safety + simplicity | Treasury Bond: Government backing + liquidity | High-Yield Savings: Full access to funds at all times
When a fixed annuity wins:
Who Should Buy a Fixed Annuity?
Appropriate For:
- Conservative savers aged 50–80 focused on capital preservation
- Pre-retirees building a safe-money allocation alongside market investments
- Anyone with a lump sum of $10,000+ they will not need for 3–10 years
- High-income earners benefiting from tax-deferred compounding
- CD holders looking for higher yields with a similar risk profile
- People who want probate avoidance through named beneficiary designation
- Retirees wanting predictable, non-market-correlated growth
- Anyone rolling over an old 401(k) or IRA into a safer allocation
Not Suitable For:
- Anyone under 40 with a long investment horizon (equities will likely outperform)
- People who may need full liquidity within 1–3 years
- Aggressive investors seeking full market participation
- Those with less than $10,000 in total retirement savings
- Anyone in a very low tax bracket who would not benefit from deferral
- People who are uncomfortable committing funds for a multi-year period
- Anyone who needs FDIC or government-backed insurance on their savings
- Those already maximally allocated to guaranteed products with no growth exposure
How to Buy a Fixed Annuity
Fixed annuities are sold exclusively through licensed insurance agents or registered representatives. They cannot be purchased directly from an insurance company without an intermediary. Here is the process:
- Define your goal. Are you accumulating a lump sum (MYGA or traditional fixed) or building future income (FIA with rider)? Your goal determines the subtype.
- Compare rates and carriers. Use a rate comparison tool (like Annuity.com’s MYGA Rate Comparison) to see current rates from 60+ carriers filtered by term, deposit amount, and carrier rating.
- Verify carrier financial strength. Check the carrier’s A.M. Best rating. We recommend A- (Excellent) or better. All guarantees depend on the carrier’s claims-paying ability.
- Work with a licensed agent. A licensed agent will confirm state availability, review your suitability, explain surrender schedules and withdrawal provisions, and complete the carrier’s official application.
- Fund the contract. Transfer via check, wire, or direct rollover from an IRA or 401(k). For qualified funds, ensure the transfer is processed as a trustee-to-trustee rollover to avoid tax consequences.
- Free look period. After the policy is issued, you have a state-mandated free look period (typically 10–30 days) during which you can cancel for a full refund with no penalty.