Investing & Markets

Annuity Types: Fixed, Variable, and Indexed

A clear breakdown of fixed, variable, and fixed indexed annuities, including how each works, their fees, tax treatment, and when they may fit into a retirement plan.

1 / 7

What Is an Annuity?

An annuity is an insurance contract that can convert a lump sum into a stream of income payments
Annuities are issued by insurance companies and come in several types with different risk profiles
They are most commonly used to generate guaranteed income in retirement
Contributions grow tax-deferred, meaning you pay no taxes on gains until you withdraw
Annuities can be immediate (payments start now) or deferred (payments start at a future date)

Fixed Annuities

A fixed annuity pays a guaranteed interest rate for a set period, similar to a CD
Your principal is protected by the insurance company regardless of market conditions
Rates are typically higher than savings accounts but locked in for the contract term
Fixed annuities are straightforward and easy to understand with minimal moving parts
They are best suited for conservative investors who want predictable, low-risk growth

Variable Annuities

Variable annuities let you invest in subaccounts similar to mutual funds within the contract
Your returns depend on the performance of the underlying investments you select
They carry market risk, your account value can go up or down with the markets
Variable annuities often have higher fees, including mortality charges and fund expenses
Optional riders can add guaranteed minimum income or death benefits for an additional cost

Fixed Indexed Annuities

A fixed indexed annuity credits interest based on the performance of a market index like the S&P 500
Your principal is protected from market losses, the floor is typically 0% in a down year
Gains are capped at a maximum rate, so you participate in only a portion of market upside
The participation rate and cap vary by contract and can be adjusted by the insurer over time
These sit between fixed and variable annuities in terms of risk and return potential

Fees, Surrender Charges, and Riders

Surrender charges apply if you withdraw more than allowed during the surrender period, often 5-10 years
Variable annuities carry mortality and expense charges typically ranging from 0.5% to 1.5% annually
Income riders that guarantee lifetime withdrawals usually cost an additional 0.5% to 1.0% per year
Fixed and indexed annuities have lower explicit fees but may embed costs in rate caps or spreads
Always compare the total cost of an annuity against simpler alternatives like bond funds or CDs

Tax Treatment of Annuities

Gains inside an annuity grow tax-deferred until you take withdrawals or begin income payments
Withdrawals of earnings are taxed as ordinary income, not at the lower capital gains rate
Withdrawals before age 59 and a half may also trigger a 10% early withdrawal penalty
Annuities do not receive a step-up in cost basis at death, unlike most other investments
Because of ordinary income treatment, annuities are generally best held outside of IRAs

Key Takeaways

Fixed annuities offer safety and simplicity for conservative savers seeking guaranteed returns
Variable annuities provide market exposure but come with higher fees and investment risk
Indexed annuities offer a middle ground with downside protection and capped upside
Understand all fees, surrender periods, and tax consequences before purchasing any annuity
Annuities work best as one piece of a broader retirement income strategy, not a standalone solution

Public Markets Private Markets Direct Indexing

Try Our Free Tools

Compound Growth Visualizer Asset Class Explorer Risk Assessment

What Is an Annuity?

An annuity is an insurance contract that can convert a lump sum into a stream of income payments
Annuities are issued by insurance companies and come in several types with different risk profiles
They are most commonly used to generate guaranteed income in retirement
Contributions grow tax-deferred, meaning you pay no taxes on gains until you withdraw
Annuities can be immediate (payments start now) or deferred (payments start at a future date)

Fixed Annuities

A fixed annuity pays a guaranteed interest rate for a set period, similar to a CD
Your principal is protected by the insurance company regardless of market conditions
Rates are typically higher than savings accounts but locked in for the contract term
Fixed annuities are straightforward and easy to understand with minimal moving parts
They are best suited for conservative investors who want predictable, low-risk growth

Variable Annuities

Variable annuities let you invest in subaccounts similar to mutual funds within the contract
Your returns depend on the performance of the underlying investments you select
They carry market risk, your account value can go up or down with the markets
Variable annuities often have higher fees, including mortality charges and fund expenses
Optional riders can add guaranteed minimum income or death benefits for an additional cost

Fixed Indexed Annuities

A fixed indexed annuity credits interest based on the performance of a market index like the S&P 500
Your principal is protected from market losses, the floor is typically 0% in a down year
Gains are capped at a maximum rate, so you participate in only a portion of market upside
The participation rate and cap vary by contract and can be adjusted by the insurer over time
These sit between fixed and variable annuities in terms of risk and return potential

Fees, Surrender Charges, and Riders

Surrender charges apply if you withdraw more than allowed during the surrender period, often 5-10 years
Variable annuities carry mortality and expense charges typically ranging from 0.5% to 1.5% annually
Income riders that guarantee lifetime withdrawals usually cost an additional 0.5% to 1.0% per year
Fixed and indexed annuities have lower explicit fees but may embed costs in rate caps or spreads
Always compare the total cost of an annuity against simpler alternatives like bond funds or CDs

Tax Treatment of Annuities

Gains inside an annuity grow tax-deferred until you take withdrawals or begin income payments
Withdrawals of earnings are taxed as ordinary income, not at the lower capital gains rate
Withdrawals before age 59 and a half may also trigger a 10% early withdrawal penalty
Annuities do not receive a step-up in cost basis at death, unlike most other investments
Because of ordinary income treatment, annuities are generally best held outside of IRAs

Key Takeaways

Fixed annuities offer safety and simplicity for conservative savers seeking guaranteed returns
Variable annuities provide market exposure but come with higher fees and investment risk
Indexed annuities offer a middle ground with downside protection and capped upside
Understand all fees, surrender periods, and tax consequences before purchasing any annuity
Annuities work best as one piece of a broader retirement income strategy, not a standalone solution

← Browse All Topics

Need Personalized Guidance?

Talk to a Wealth Advisor

These highlights cover the essentials. For advice tailored to your specific situation, schedule a complimentary consultation with our team.

Talk to an Advisor100% Fiduciary · Fee-Only · No Commissions

The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Annuity Types: Fixed, Variable, and Indexed

What Is an Annuity?

Fixed Annuities

Variable Annuities

Fixed Indexed Annuities

Fees, Surrender Charges, and Riders

Tax Treatment of Annuities

Key Takeaways

What Is an Annuity?

Fixed Annuities

Variable Annuities

Fixed Indexed Annuities

Fees, Surrender Charges, and Riders

Tax Treatment of Annuities

Key Takeaways

Related Topics

Annuities Explained: When They Help and When to Walk Away

Charitable Gift Annuities: Income for You, Impact for Others

Pension Lump Sum vs Annuity, Evaluating Your Payout Options

Annuity Types: Fixed, Variable, and Indexed

What Is an Annuity?

Fixed Annuities

Variable Annuities

Fixed Indexed Annuities

Fees, Surrender Charges, and Riders

Tax Treatment of Annuities

Key Takeaways

What Is an Annuity?

Fixed Annuities

Variable Annuities

Fixed Indexed Annuities

Fees, Surrender Charges, and Riders

Tax Treatment of Annuities

Key Takeaways

Related Topics

Annuities Explained: When They Help and When to Walk Away

Charitable Gift Annuities: Income for You, Impact for Others

Pension Lump Sum vs Annuity, Evaluating Your Payout Options