Annuity basics

How Fixed Annuities and MYGAs Work

A fixed annuity is a contract with an insurance company that credits interest at a declared rate. Here is a neutral, plain-language overview of how these contracts typically work — and the tradeoffs to understand.

Accumulation and the guaranteed rate

You fund a fixed annuity with a premium — either a single lump sum or, for some contracts, additional payments. During the accumulation phase, the insurer credits interest to the contract at a declared rate. With a MYGA (multi-year guaranteed annuity), that rate is guaranteed for a stated period, commonly 3, 5, 7, or 10 years. Other fixed annuities may credit a rate that the insurer can reset periodically, subject to a stated minimum. Interest generally compounds inside the contract without being taxed until it is withdrawn. See this week’s featured MYGA rates for examples.

Surrender periods and free withdrawals

Fixed annuities are designed to be held for the guarantee period. A surrender period is the time during which withdrawing more than the contract allows — or cancelling the contract — can trigger a surrender charge. The charge typically starts higher and declines over time until it reaches zero. Some contracts also apply a market value adjustment (MVA), which can increase or decrease the amount you receive on an early surrender depending on interest-rate movements.

Many contracts include a free-withdrawal provision that lets you take out a limited amount each year, often expressed as a percentage of the contract value, without a surrender charge. Terms vary by contract, and free withdrawals may still be taxable. Many contracts also waive charges in certain circumstances, such as death of the owner, which the contract will describe. Ask for the contract’s surrender schedule and withdrawal terms before you decide.

Taxes and the 59½ rule

Interest in a fixed annuity generally grows tax-deferred: you are not taxed on it until you take it out. When you do withdraw from a non-qualified annuity (one purchased with after-tax dollars), withdrawals are generally treated as earnings first and taxed as ordinary income, then as a return of principal. Gains withdrawn before age 59½ may also be subject to a 10% additional federal tax, with certain exceptions. Annuities held in an IRA or other retirement account follow the rules of that account, including required minimum distributions. Tax-deferred is not tax-free, and state taxes may apply. Talk with a qualified tax advisor about your circumstances.

Payout options

At the end of the accumulation period, contract holders typically have choices. Options vary by contract but commonly include:

  • Taking the money as a lump sum (which may be taxable).
  • Renewing or exchanging the contract for a new guarantee period, or exchanging into another annuity (a tax-free exchange under IRC Section 1035 may be possible in some cases).
  • Converting to an income stream (“annuitizing”), for example income for life, for a set period, or for the lives of two people (joint and survivor). Income payments generally depend on the amount converted, age, the payout option, and the insurer’s rates. Annuitization is typically irrevocable once started.

Fixed annuities also generally pay a death benefit to named beneficiaries, with terms set by the contract.

Insurer ratings and state guaranty associations

A fixed annuity’s guarantee is backed by the claims-paying ability of the issuing insurance company. Independent rating agencies — such as A.M. Best, S&P, Moody’s, and Fitch — publish financial strength ratings. Ratings are opinions about an insurer’s financial strength, not guarantees, and they can change.

Annuities are not FDIC insured. Every state has a life and health insurance guaranty association that may provide limited protection to policyholders if an insurer becomes insolvent. Coverage limits and conditions differ by state — New York has its own — and these associations are not government guarantees. Check your state’s association for current details. For a side-by-side look at how annuity protection compares with bank deposit insurance, see MYGA vs. Bank CD.

Who might consider a fixed annuity?

People who value predictable growth, are comfortable leaving money untouched through the guarantee period, and want tax-deferral are sometimes interested in fixed annuities. They may be less suitable for money you may need on short notice, or for people who want market-linked growth potential. Whether one fits depends on your full financial picture — this page can’t make that determination.

Common questions

Frequently asked questions

What is a MYGA?

A MYGA (multi-year guaranteed annuity) is a type of fixed annuity that credits a declared interest rate that is guaranteed for a set number of years, such as 3, 5, 7, or 10. When the guarantee period ends, the contract holder typically has options such as renewing, withdrawing, exchanging, or converting to income, subject to the contract terms.

Are fixed annuities FDIC insured?

No. Fixed annuities are insurance contracts, not bank deposits, so they are not FDIC insured. Their guarantees depend on the claims-paying ability of the issuing insurance company. State life and health insurance guaranty associations may provide limited protection if an insurer fails; coverage limits and conditions vary by state.

What is a surrender charge?

A surrender charge is a fee that may apply if you withdraw more than the contract’s free-withdrawal amount or cancel the contract during the surrender period. Charges usually decline over time and are spelled out in the contract.

Can I take money out before the surrender period ends?

Many contracts allow a limited amount to be withdrawn each year without a surrender charge (a free-withdrawal provision). Amounts above that may be subject to surrender charges and, in some contracts, a market value adjustment. Withdrawals may also be taxable.

How are fixed annuities taxed?

Interest generally grows tax-deferred and is taxed as ordinary income when withdrawn. For non-qualified annuities, withdrawals are generally treated as earnings first. Gains withdrawn before age 59½ may be subject to a 10% additional federal tax, with certain exceptions. Tax rules are complex — consult a qualified tax advisor.

What happens at the end of the guarantee period?

Contracts vary. Many allow a window to renew at a new rate, withdraw the funds, exchange into another annuity, or choose an income option. Review your contract’s terms and ask the insurer about the options and timing.

Are fixed annuities available in every state?

No. Product availability, features, and rates vary by state, and New York has its own rules that differ from those in other states.