Annuities

An annuity is a contract between you and an insurance company where you pay a premium, and the insurer agrees to pay you income, either starting now or at a future date. Income annuities turn savings into a paycheck; fixed annuities credit a set interest rate for a defined term.

A SPIA is a single-premium immediate annuity where income begins shortly after you buy it, typically within 12 months. A DIA is a deferred income annuity where you pay now and income begins at a future date you choose. A MYGA is a multi-year guaranteed annuity that credits a fixed interest rate for a set term and isn't primarily used for immediate income.

Annuity payments are backed by the claims-paying ability of the issuing insurance company, not by the FDIC or any federal agency. State guaranty associations provide limited backstop protection up to statutory amounts that vary by state and product. Carrier selection matters, and diversifying across carriers can be appropriate for larger premiums.

Income annuities are typically considered by individuals approaching or in retirement who want a predictable income stream to cover essential expenses, or who are concerned about outliving their savings. MYGAs are typically considered by savers looking for a fixed interest rate on money they don't need for several years. Annuities aren't appropriate for every situation, and suitability depends on your full financial picture.

Fixed annuities offer a guaranteed interest rate for a set term, subject to the claims-paying ability of the issuer. That isn't the same as a guaranteed return on the overall contract, because surrender charges, market-value adjustments, taxes, and withdrawal timing can affect what you actually receive. Always read the contract's rate, term, and surrender schedule before committing.

Tax treatment depends on whether the annuity is qualified or non-qualified and on the type of contract. Under current federal tax law, payments from a non-qualified immediate annuity are typically part return of premium and part taxable gain, while payments from a qualified annuity funded with pre-tax dollars are generally fully taxable as ordinary income. Withdrawals before age 59½ may be subject to a 10 percent federal tax penalty.

Generally yes, but with conditions. Most deferred fixed annuities allow a free-withdrawal amount each year, often around 10 percent of the contract value, with surrender charges and possible market-value adjustments applying to amounts above that during the surrender period. Immediate annuities have little to no liquidity once income has started, depending on the contract's features.

A MYGA is issued by an insurance company and a CD is issued by a bank, and the guarantees come from different places. MYGA interest is tax-deferred under current federal tax law until withdrawn, while CD interest is generally taxed each year it's credited. CDs are FDIC-insured up to applicable limits, while MYGAs are backed by the insurer's claims-paying ability and state guaranty association coverage within statutory limits.