- A fixed annuity is an insurance contract that credits a guaranteed interest rate — your principal is protected from market losses when held to maturity.
- Fixed annuities have zero annual management fees. The insurer earns profit from the spread between its investment return and your credited rate.
- MYGAs (Multi-Year Guaranteed Annuities) lock in one rate for the full term; traditional fixed annuities may adjust the credited rate annually above a guaranteed minimum.
- As of early 2026, the best 5-year MYGA rates from A-rated carriers exceed 5.70% APY — significantly above comparable bank CDs.
- Fixed annuity earnings grow tax-deferred, which can produce better after-tax returns than a CD paying the same rate.
- Fixed annuities are not FDIC insured. All guarantees depend on the issuing insurer’s financial strength and claims-paying ability.
- What Is a Fixed Annuity?
- How Fixed Annuities Work
- Traditional Fixed vs. MYGA
- Current Fixed Annuity Rates
- How Fixed Annuities Are Taxed
- Fixed Annuities vs. CDs
- Fixed Annuities vs. Other Annuity Types
- Pros and Cons
- Who Should Buy a Fixed Annuity?
- Who Should NOT Buy a Fixed Annuity?
- How to Evaluate a Fixed Annuity
- Frequently Asked Questions
What Is a Fixed Annuity?
A fixed annuity is an insurance contract that credits a guaranteed interest rate on the money you deposit. Unlike stocks, mutual funds, or variable annuities, your account value never declines because of market performance. The insurance company assumes all investment risk and, in return, guarantees you a stated rate of return for a defined period. Your principal is protected from market losses when held to maturity.
Fixed annuities are the simplest type of annuity available. There are no subaccounts to manage, no index formulas to understand, and typically no annual management fees. The insurance company invests your premium in its general account — primarily investment-grade bonds and mortgage-backed securities — and credits your account with a guaranteed rate that is lower than the insurer’s own investment return. The difference is the insurer’s profit margin, known as the “spread.”
Because they are insurance products, fixed annuities are not FDIC insured. All guarantees — including the interest rate and principal protection — depend entirely on the issuing insurance company’s financial strength and claims-paying ability. This is why carrier selection matters: choosing insurers with strong A.M. Best ratings (A- or better) is essential. Insurance companies are also subject to rigorous state regulatory oversight and must maintain statutory reserves to meet policyholder obligations.
Fixed annuities occupy a unique space in the retirement landscape. They offer higher rates than most bank CDs, tax-deferred growth that CDs cannot match, and the ability to convert accumulated savings into guaranteed lifetime income. For conservative investors who prioritize safety and predictability over maximum growth, fixed annuities are among the most efficient tools available.
How Fixed Annuities Work
Every fixed annuity moves through two distinct phases. Understanding both is essential to knowing when and how you’ll access your money.
The Accumulation Phase
During the accumulation phase, the insurance company credits interest to your account at the guaranteed rate. This interest compounds on a tax-deferred basis — you owe no income tax on the credited interest until you take a withdrawal. Tax deferral means your full balance compounds year after year without the annual tax drag that erodes returns in a taxable savings account or CD. Over a 5- to 10-year period, this compounding advantage can produce meaningfully higher after-tax returns.
Most fixed annuities credit interest daily or monthly, and the compounding works the same way it does in any interest-bearing account: this year’s interest earns interest next year. Unlike a bank CD, however, the interest does not generate a 1099 each year, which simplifies your annual tax filing and preserves more of your balance for future growth.
The Distribution Phase
When you’re ready to access your money, you have several options. You can take systematic withdrawals from the account (most contracts allow 10% per year without surrender charges). You can annuitize the contract, converting your accumulated value into a guaranteed stream of income payments — for a set period or for life. Or you can execute a 1035 exchange, transferring the balance tax-free into another annuity product (such as a SPIA for immediate income or a new MYGA at a higher rate).
The flexibility of the distribution phase is one of the advantages fixed annuities hold over bank CDs. A CD matures and returns your cash. A fixed annuity matures and gives you the option to take cash, roll into a new rate, or convert to lifetime income — all without triggering a taxable event if done through a 1035 exchange.
How the Insurer Makes Money: The Spread
Insurance companies invest your premium in their general account, which holds primarily investment-grade corporate bonds, government securities, and commercial mortgage loans. If the insurer earns 6.5% on its portfolio and credits you 5.0%, the 1.5% difference is the insurer’s spread — its profit margin that covers operating costs and generates shareholder returns. Because the spread is built into the rate rather than charged as a separate fee, fixed annuities have zero explicit annual fees. You simply earn the rate you were quoted.
Traditional Fixed vs. MYGA
The term “fixed annuity” encompasses two distinct product designs. Understanding the difference is important because it affects rate certainty, renewal risk, and how you should evaluate competing offers.
A traditional fixed annuity (sometimes called a “declared-rate” or “book-rate” annuity) credits an interest rate that the insurer sets and may adjust each year. The contract includes a guaranteed minimum rate — typically 1% to 3% — below which the credited rate can never fall. In practice, insurers usually credit rates above the minimum to remain competitive, but the actual rate you earn each year is at the insurer’s discretion. This introduces renewal risk: the possibility that the insurer lowers your rate after the initial period, though never below the contractual minimum.
A MYGA (Multi-Year Guaranteed Annuity) eliminates renewal risk by locking in one specific rate for the entire contract term — typically 2 to 10 years. The rate you see at purchase is the rate you earn every year until the term ends. MYGAs are the closest annuity equivalent to a bank CD: a known rate, a known term, and a known outcome.
| Feature | Traditional Fixed | MYGA |
|---|---|---|
| Rate structure | Declared annually by insurer | Locked for entire term |
| Guaranteed minimum | Yes (typically 1–3%) | Yes (the stated rate IS the guarantee) |
| Renewal risk | Yes — rate may decrease at renewal | None — rate is contractually fixed |
| Typical terms | 5–10+ years | 2–10 years |
| Annual fees | None | None |
| Best for | Longer-term savers comfortable with rate variability | Savers who want rate certainty (CD-like experience) |
| Flexibility | May accept additional deposits | Usually single-premium only |
For most conservative savers in the current rate environment, MYGAs are the more popular choice because they eliminate guesswork. You know exactly what you’ll earn from day one through maturity. Traditional fixed annuities can make sense if you want the ability to add funds over time or if you believe rates will rise and the insurer will pass those increases along — though there is no guarantee they will.
Current Fixed Annuity Rates
The interest rate environment of 2025–2026 has been exceptionally favorable for fixed annuity buyers. After the Federal Reserve raised rates aggressively in 2022–2023 to combat inflation, annuity rates climbed to levels not seen in over a decade. While the Fed began easing in late 2024, the rate environment remains historically elevated, and insurance companies continue to offer highly competitive fixed annuity rates.
As of early 2026, the best 5-year MYGA rates from carriers rated A- or better by A.M. Best exceed 5.70% APY. Seven-year terms reach above 6.50%, and 10-year terms from select carriers are available above 6.50% as well. These rates are significantly higher than comparable bank CDs, which typically top out at 4.25–4.50% for 5-year terms.
Fixed annuity rates are influenced by several factors. The most important is the yield on investment-grade corporate bonds, which form the backbone of insurance company general account portfolios. When bond yields are high, insurers can afford to offer higher credited rates. Carrier competition also plays a role: insurers competing aggressively for new deposits may offer above-market rates, particularly on shorter terms. Your deposit size, the length of the surrender period, and the carrier’s current appetite for new business all affect the specific rate you’ll be offered.
How Fixed Annuities Are Taxed
One of the primary advantages of a fixed annuity over a bank CD is tax-deferred growth. Interest credited to your fixed annuity compounds without generating an annual 1099 tax form. You owe no income tax on the gains until you withdraw money. This tax deferral allows your full balance to compound each year, producing a larger account value over time compared to a taxable account earning the same rate.
Non-Qualified Fixed Annuities
A non-qualified fixed annuity is one purchased with after-tax dollars — money that has already been taxed. When you take withdrawals, the IRS applies last-in, first-out (LIFO) treatment, meaning earnings come out first and are taxed as ordinary income at your marginal tax rate. Once all earnings have been withdrawn, subsequent withdrawals represent a return of your original premium and are tax-free. If you annuitize the contract (convert it to income payments), each payment is split between taxable earnings and non-taxable return of premium using an “exclusion ratio.”
Qualified Fixed Annuities
A qualified fixed annuity is purchased inside a tax-advantaged retirement account such as an IRA, 401(k), or 403(b). Because the funds went in pre-tax, the entire withdrawal is taxed as ordinary income — both the original premium and the accumulated interest. Qualified annuities are also subject to required minimum distributions (RMDs) starting at age 73 (or 75 for those born after 1960).
Early Withdrawal Penalty
Regardless of whether a fixed annuity is qualified or non-qualified, withdrawals taken before age 59½ are subject to a 10% IRS early withdrawal penalty on the taxable portion, in addition to ordinary income tax. There are limited exceptions, including disability and substantially equal periodic payments (SEPP/72t). This penalty is separate from any surrender charges the insurance company may impose.
It is important to note that annuity earnings are always taxed as ordinary income, not at the more favorable long-term capital gains rate. For investors in high tax brackets, this distinction matters. However, for retirees who expect to be in a lower bracket during retirement, the years of tax-deferred compounding often more than compensate for the ordinary income treatment upon withdrawal.
Fixed Annuities vs. CDs
Fixed annuities and bank CDs are the two most commonly compared conservative savings products. Both offer a guaranteed rate of return with principal protection. But they differ in important ways that can significantly affect your after-tax returns, estate planning, and retirement income options.
| Feature | Fixed Annuity / MYGA | Bank CD |
|---|---|---|
| Current top 5-year rate | 5.70%+ | 4.25–4.50% |
| Tax treatment | Tax-deferred until withdrawal | Interest taxed annually (1099-INT) |
| Safety | Backed by insurer’s financial strength and claims-paying ability; state regulatory oversight | FDIC insured up to $250K per depositor per bank |
| Annual fees | None | None |
| Early withdrawal | Surrender charges (declining); 10%/yr typically free | Early withdrawal penalty (3–12 months interest) |
| Income conversion | Yes — annuitize or 1035 exchange to SPIA | No — matures to cash only |
| Probate | Bypasses probate via beneficiary designation | May go through probate (varies by state) |
| Contribution limits | None (non-qualified) | None |
| Creditor protection | Protected from creditors in many states | Generally not protected from creditors |
For someone in a 24% federal tax bracket, a CD paying 4.50% yields an after-tax return of approximately 3.42%. A MYGA paying 5.70% with tax-deferred compounding grows at the full 5.70% each year, with taxes due only upon withdrawal. Over a 5-year term, this difference — both the higher rate and the tax-deferral advantage — compounds into a meaningful gap in after-tax wealth.
CDs have one clear advantage: FDIC insurance. If the issuing bank fails, the federal government guarantees your deposit up to $250,000. Fixed annuities do not have this federal backstop. However, insurance companies are subject to rigorous state regulatory oversight and must maintain statutory reserves. The insurance industry has an extremely strong track record of meeting policyholder obligations, even through severe economic downturns.
For investors who value rate, tax efficiency, estate planning, and income optionality — and who are comfortable with the insurance company model — fixed annuities frequently outperform CDs on a net basis.
Fixed Annuities vs. Other Annuity Types
Fixed annuities are just one of several annuity types available. Each type is designed for a different balance of growth, income, and risk. Here’s how fixed annuities compare to the other major categories:
| Feature | Fixed / MYGA | Fixed Indexed (FIA) | Variable | SPIA |
|---|---|---|---|---|
| Growth mechanism | Guaranteed interest rate | Linked to market index (with caps) | Market-based subaccounts | N/A — income product |
| Risk level | Very low | Low–Medium | Medium–High | Very low |
| Principal protection | Yes (when held to maturity) | Yes (from market losses, when held to maturity) | No — account can lose value | Premium converted to income stream |
| Annual fees | None | 0–1.5% | 2–3%+ | None (built into rate) |
| Return potential | Moderate (guaranteed) | Moderate (capped upside) | High (but with risk) | Fixed income payout |
| Best for | Conservative savers wanting predictable growth | Moderate-risk savers wanting upside with protection | Growth-oriented investors comfortable with market risk | Retirees needing immediate income |
| Complexity | Very simple | Moderate | Complex | Simple |
If your primary goal is predictable, guaranteed growth with minimal complexity, a fixed annuity or MYGA is the most straightforward choice. If you want the possibility of higher returns without risking your principal, a fixed indexed annuity adds market-linked upside. Variable annuities offer the highest growth potential but introduce market risk and substantially higher fees. SPIAs are designed for a completely different purpose: converting a lump sum into guaranteed income, typically at or near retirement.
Many financial professionals recommend a combination approach: a MYGA for the safe, guaranteed portion of your retirement savings and a fixed indexed or variable annuity for the portion allocated to growth. The right mix depends on your risk tolerance, time horizon, income needs, and overall financial picture.
Pros and Cons of Fixed Annuities
Every financial product involves trade-offs. Fixed annuities trade liquidity and maximum growth potential for safety, simplicity, and guaranteed returns. Here is an honest assessment of both sides:
- Guaranteed interest rate — your return is contractually guaranteed by the insurance company, regardless of market conditions
- No annual management fees — the insurer’s profit is built into the spread, not charged as a separate expense
- Principal protection — your deposited funds are protected from market losses when held to maturity
- Tax-deferred growth — no annual taxes on interest until withdrawal, allowing faster compounding
- No contribution limits — unlike IRAs and 401(k)s, you can deposit any amount into a non-qualified fixed annuity
- Simple to understand — no index formulas, subaccounts, or riders to evaluate. A stated rate for a stated term.
- Death benefit and probate avoidance — account value passes to named beneficiaries outside probate
- Limited liquidity — surrender charges apply to withdrawals exceeding the free-withdrawal allowance during the surrender period (typically 3–10 years)
- Lower return potential than market-based products — you trade upside potential for certainty
- Earnings taxed as ordinary income — not at the lower long-term capital gains rate
- 10% IRS penalty before age 59½ — early withdrawals on the taxable portion trigger an additional penalty
- Not FDIC insured — backed solely by the issuing insurer’s financial strength and claims-paying ability
- Renewal risk on traditional fixed annuities — the credited rate may decrease at renewal (MYGAs eliminate this risk)
- Inflation risk — a fixed rate may not keep pace with inflation over long periods unless you ladder terms or combine with inflation-linked products
Who Should Buy a Fixed Annuity?
Fixed annuities are not for everyone, but they are an excellent fit for specific financial situations and goals. The people who benefit most tend to share a few common characteristics:
Conservative investors approaching or in retirement. If you are within 5–15 years of retirement (or already retired) and want a safe place for a portion of your savings, a fixed annuity provides guaranteed growth without market volatility. You know exactly what your balance will be at the end of each year, which makes retirement planning more predictable.
CD holders looking for better rates and tax efficiency. If you currently hold bank CDs and are frustrated by lower rates and annual tax on interest, a MYGA offers a compelling alternative. In the current rate environment, MYGAs consistently pay 1–2 percentage points more than comparable CDs, and the tax-deferred compounding widens that advantage further.
People who want guaranteed growth without market risk. If the thought of your retirement savings declining by 20–30% during a market correction keeps you up at night, a fixed annuity removes that possibility entirely. Your account credits interest every year and never goes backward due to stock or bond market performance.
Savers who have maxed out other tax-advantaged accounts. If you’ve contributed the maximum to your 401(k), IRA, and HSA, a non-qualified fixed annuity offers additional tax-deferred growth with no contribution limits. This is particularly valuable for high earners with significant savings beyond their employer-sponsored plans.
People who want the option to convert savings to income later. Unlike a CD — which simply matures to cash — a fixed annuity gives you the ability to annuitize or 1035 exchange into a lifetime income product when you’re ready. This optionality can be valuable for retirees who aren’t sure yet whether they’ll need guaranteed income.
Who Should NOT Buy a Fixed Annuity?
Being honest about who fixed annuities are not right for is just as important as explaining who they serve well. A fixed annuity is probably not the best choice if:
You need liquidity in the near term. If there is a meaningful chance you will need access to the full amount within the next 3–5 years, a fixed annuity’s surrender charges make it a poor fit. Surrender penalties can range from 2% to 8% or more in the early years. Keep short-term funds in a high-yield savings account, money market fund, or short-term CD.
You are seeking aggressive growth. Fixed annuities trade maximum growth potential for certainty. If your goal is to maximize returns and you have a high risk tolerance, equity investments, variable annuities, or fixed indexed annuities may be more appropriate — though all carry market-related risks that fixed annuities do not.
You are a young investor with a long time horizon. If you are in your 20s, 30s, or even early 40s and won’t need the money for 25+ years, the lower long-term return potential of a fixed annuity compared to equities may not be the optimal use of those funds. Younger investors generally benefit more from long-term equity exposure, which has historically outperformed fixed-rate products over multi-decade periods.
You are using emergency funds. A fixed annuity should never be funded with money you might need for unexpected expenses. Financial advisors typically recommend maintaining 6–12 months of living expenses in fully liquid accounts before committing any funds to an annuity.
How to Evaluate a Fixed Annuity
Not all fixed annuities are created equal. Before committing your savings, evaluate each product across these key dimensions:
The guaranteed interest rate. This is the most obvious factor, but don’t compare rates in isolation. A slightly lower rate from a stronger carrier or with a shorter surrender period may be a better overall value. For MYGAs, the guaranteed rate is the rate you earn — simple and clear. For traditional fixed annuities, ask about both the current credited rate and the contractual guaranteed minimum.
The term length. Fixed annuity terms typically range from 2 to 10 years. Longer terms generally offer higher rates but lock up your money for a longer period. Consider your income needs and whether you might want to access the funds before the term ends. Many planners recommend a laddering strategy — splitting your funds across multiple terms (e.g., 3-year, 5-year, and 7-year MYGAs) to balance rate and liquidity.
The surrender schedule. Review the surrender charge schedule carefully. How much is the penalty in year one? How quickly does it decline? When does it reach zero? A product with a higher rate but a steeper, longer surrender schedule may not be worth the trade-off if there is any chance you’ll need early access.
Carrier financial strength. Because all guarantees depend on the insurer’s claims-paying ability, the carrier’s financial strength is non-negotiable. Look for an A.M. Best rating of A- (“Excellent”) or better. Also review ratings from S&P, Moody’s, and Fitch if available. A slightly lower rate from an A+ rated carrier is generally preferable to a slightly higher rate from a B++ rated carrier.
Free-withdrawal provisions. Most fixed annuities allow you to withdraw up to 10% of your account value per year without incurring surrender charges. Some contracts offer more generous provisions (15% or even 20% in certain years). This liquidity feature matters — it determines how much cash flow you can access without penalty during the surrender period.
Death benefit and beneficiary provisions. Confirm that the contract passes the full account value to your named beneficiary upon death, and that the death benefit bypasses probate. Some contracts offer enhanced death benefits for an additional cost, which may or may not be worthwhile depending on your estate planning needs.