What is an annuity?

An annuity in plain words

An annuity is a contract with an insurance company. You pay in, either all at once or over time, and in exchange the insurer pays you income, starting now or at a later date. Many people use one to turn part of their savings into a steady paycheck in retirement, and some annuities can pay for the rest of your life.

While the money sits in the annuity, you owe no tax on what it earns. Tax is due only when you take money out, start the income, or a death benefit is paid.

Now or later: immediate and deferred

An immediate annuity is bought with one payment, and income usually starts within a year. A deferred annuity can be funded with one payment or several, and it has a growing stage, the accumulation phase, before the income begins.

Fixed, indexed and variable

Annuities also differ in how the money grows. Investor.gov lists the common deferred kinds from least to most risk:

A fixed annuity credits interest and promises it will not fall below a set minimum rate. A fixed indexed annuity credits interest tied in part to a market index, such as the S&P 500, and you learn the rate only at the end of each term; the credit does not go below zero. A registered index-linked annuity (RILA) also follows an index, but its value can go down, so you can lose money. A variable annuity lets you choose among investment funds, and its value rises and falls with them.

Who oversees them depends on the kind. State insurance commissioners regulate annuities, and variable annuities are also registered as securities with the SEC.

Charges to understand first

Most annuities expect you to leave the money in for years. If you take out money within the first several years, part of it can be lost to a surrender charge, and these charges usually shrink over time. Taking money out before age 59½ can also bring a 10% IRS tax penalty on top of the income tax owed.

Some fees are easy to see, like a yearly contract fee shown on your statement. Others are built in: many fixed and indexed annuities charge no ongoing fee you can see, but the cost shows up as a cap on how much interest you can earn.

Payments also depend on the insurer staying financially sound, so the company's strength matters. Before you buy, read what you are given, ask how long your money must stay in to avoid charges, and get a tax advisor or financial planner to weigh in on whether an annuity fits your plans.

Common questions

Last reviewed October 2026. Rules and prices can change; check the sources below for the official details.