Annuity Planning

Annuities address two problems: money you will not need for several years that you want to earn a locked-in return unaffected by markets, and the worry of outliving your savings, which can be handled by turning part of them into income that lasts as long as you do. If Social Security and pensions already cover basic expenses, or the money may be needed for a home or tuition in the next few years, an annuity is usually not the first choice. Withdrawals in the early years trigger a surrender charge, a percentage the insurer deducts if you withdraw or cancel during the surrender period, so we generally place only money you are sure you will leave untouched.

A multi-year guaranteed annuity (MYGA) is a fixed annuity that credits a contractual rate for a set term, much like a CD, except the interest is not taxed each year until withdrawn (tax deferral); when it is withdrawn, the interest is taxed as ordinary income, not at lower capital-gains rates. The protection differs: CDs are insured by the FDIC up to its limits, while a MYGA depends on the issuing insurer’s claims-paying ability, and if the insurer fails, the California Life and Health Insurance Guarantee Association covers annuities at 80% of present value, up to $250,000 per person (rules in effect in 2026), a limited backstop that does not replace choosing a financially sound insurer. Liquidity differs too: breaking a CD usually costs some interest, while withdrawing beyond the free amount during a MYGA’s surrender period triggers a surrender charge and, in some contracts, a market value adjustment (MVA) tied to interest rates, so compare the two on the same term and after-tax basis.

A fixed indexed annuity (FIA) credits interest based on the rise of a stock index without investing your money in the market: when the index rises, interest is limited by a cap (the maximum rate credited for a period) or a participation rate (the share of the index gain that is credited), and when it falls, that period is credited 0% and the account value does not drop because of the index. As a hypothetical example, if the index rises 12% in a year and the cap is 8%, you are credited 8%; since index returns generally exclude dividends, long-run returns are usually lower than holding an index fund, in exchange for no losses in down years. “No loss of principal” holds only if you keep the contract through the surrender period and the insurer can meet its obligations, and because most caps and participation rates can be reset annually, the first-year figures do not describe every year.

A variable annuity invests your money in subaccounts within the contract, so its value rises and falls with the market and principal can be lost; it usually carries management, mortality-and-expense and rider fees, and tends to suit people who can accept volatility and value tax deferral or guaranteed riders. Variable annuities and variable life insurance are securities, offered by securities-licensed professionals through a partner broker-dealer, and you receive a prospectus describing costs and risks before buying. An IRA is already tax-deferred, so any annuity inside it adds no extra tax benefit and has to be justified by what the annuity itself does, such as a locked rate, downside protection or lifetime income. If the surrender period overlaps with required minimum distributions (RMDs, the amounts the IRS requires you to withdraw each year from pre-tax accounts once you reach the required age), confirm the contract lets you take them without a surrender charge.

In California, a buyer aged 60 or older has a free-look period of at least 30 days after an individual annuity is delivered, during which the contract can be returned for a refund of the premium paid. After that, many contracts allow a portion to be withdrawn each year without charge, and anything above that during the surrender period incurs a surrender charge. Withdrawals are also taxed: the earnings portion is ordinary income, and before age 59½ an additional 10% tax generally applies, so we set aside an adequate emergency reserve before deciding how much goes into an annuity.