Types of Annuities: SPIAs, MYGAs, QLACs, Indexed and Variable, Explained

Sellers usually classify annuities by how the money grows (fixed, indexed or variable) and when payments start (immediate or deferred). That is accurate but not very useful. The question that matters to you is what problem the contract solves and what you give up for it. The table sorts the seven types you are likely to be offered that way.

Two more distinctions cut across all seven. A qualified annuity is held inside an IRA, 401(k) or other retirement plan and is taxed like the account around it. A non-qualified annuity is bought with money that has already been taxed, and gets its own tax rules, covered below. And every guarantee in every type is only as good as the insurance company that makes it.

You give an insurer a lump sum and it pays you a fixed amount every month, starting within a year, for as long as you live. That is the whole product. A SPIA can pay more than a bond ladder of the same size because of mortality credits: the insurer pools thousands of buyers, and the money of those who die early pays the income of those who live long. You are buying the right to be one of the long-lived without running out.

The payout depends on your age and sex at purchase, interest rates that day, and the option you choose:

• •Life only pays the most and stops at death, even if that is a month after purchase.
• •Life with period certain (for example 10 years) keeps paying a beneficiary until the period ends if you die early.
• •Cash or installment refund returns any premium not yet paid out to your beneficiary.
• •Joint and survivor pays until the second of two people dies, often at a reduced amount after the first death.

Each guarantee you add lowers the payment. Most payments are fixed in dollars, so a 3% inflation rate cuts their buying power by roughly a quarter in ten years; contracts with built-in annual increases start lower. And the decision is effectively permanent: once payments begin, the lump sum is gone.

Before buying a SPIA, price the one you already own. Each year you delay Social Security past full retirement age raises your benefit by 8%, until 70 (SSA), and that income is inflation-adjusted, backed by the federal government and, for the higher earner in a couple, passed to the survivor. No insurer sells that combination. Our guide to when to claim Social Security works through the trade. If you have a pension with a lump-sum option, you are also being offered an annuity; see pension lump sum vs. annuity for how to value it. For a fixed-period payout from a lump sum, the annuity payout calculator shows the income a given rate and term produce, which is the benchmark a life annuity has to beat.

A deferred income annuity is a SPIA with a gap: you pay now and payments start years later, say at 80 or 85. Because the insurer holds the money longer and some buyers will not live to collect, a DIA buys much more income per dollar than a SPIA. It is the purest form of longevity insurance, and a small purchase can protect a portfolio from the scenario that ruins most withdrawal plans: living to 95.

A qualifying longevity annuity contract, or QLAC, is a DIA bought inside a traditional IRA or employer plan that meets IRS rules. The value of a QLAC is excluded from the balance used to figure required minimum distributions, and payments must begin no later than age 85 (IRS final RMD regulations, 2024). SECURE 2.0 removed the old limit of 25% of the account balance and set a dollar limit, indexed for inflation. For 2026 that limit remains $210,000 (IRS Notice 2025-67). It applies per person across all your QLACs, so a married couple can each buy one from their own IRAs. The regulations also allow joint and survivor payments that survive a later divorce, a return-of-premium death benefit, and a right to rescind the purchase within 90 days.

The RMD benefit is real but modest. Moving $210,000 out of the RMD base at 73, or 75 if you were born in 1960 or later, lowers the first required withdrawal at 73, when the IRS divisor is 26.5, by about $7,925. The main reason to buy a QLAC is the income after 85, not the tax deferral. Our RMD calculator shows what your required withdrawals would be with and without the QLAC balance. Roth IRAs have no lifetime RMDs, so there is nothing for a QLAC to defer there.

A multi-year guaranteed annuity is an insurer's version of a CD: a fixed rate for a fixed term, usually three to ten years. The differences that matter are the guarantee, the tax treatment and the exit terms.

The state guaranty association is a real backstop but not the FDIC. Each state runs its own, the coverage limits for annuities differ by state, and they apply per insurer, not per contract. Look up your state's limit through the National Organization of Life and Health Insurance Guaranty Associations before you buy, and if the amount is larger than your state covers, split it across insurers.

When a MYGA wins: you are investing taxable money you will not need for the term, you are in a high bracket now and expect a lower one later, and the MYGA rate beats a Treasury of the same maturity by enough to cover the difference in state tax and credit risk. When it loses: in an IRA, where tax deferral is already provided and a Treasury or CD is simpler and more liquid; in a high-tax state against Treasuries; and for money you may want to leave to heirs, because the deferred interest is taxed to them as ordinary income.

A fixed index annuity credits interest based on part of the rise in a market index, and credits zero rather than a loss when the index falls. The word that matters is “part.” The SEC lists the ways the credit is cut, with its own examples (SEC Investor Bulletin):

Three details decide how the product performs. First, the insurer can usually reset caps, participation rates and spreads each crediting period, so the attractive first-year terms are not a promise about year five. Second, the index is often measured point to point over a year, or by averaging, which lowers the measured gain. Third, the contract locks you in: surrender periods typically last six to ten years or longer, and withdrawals during that time above the free amount cost a surrender charge (SEC). The SEC also notes that these features “can reduce your return in the same way that a direct fee would even if the annuity is called a ‘no fee’ annuity.”

Many indexed annuities are sold with an income riderthat promises withdrawals for life based on an “income base” that grows at, say, a stated roll-up rate. The income base is an accounting figure, not money you can withdraw or leave to heirs. Your real cash value is the contract value, which grows only by the index credits. When comparing a rider to a SPIA, compare the guaranteed lifetime income per dollar of premium, not the roll-up rate.

A registered index-linked annuity, sometimes called a buffer annuity, trades some downside for higher caps than a fixed index annuity. It is registered with the SEC, sold with a prospectus, and can lose money (FINRA). You choose between two kinds of protection, which work in opposite ways (SEC):

• •Buffer: the insurer absorbs the first slice of loss. With a 10% buffer and a 12% index drop, you lose 2%. With a 30% drop, you lose 20%.
• •Floor: you absorb losses up to a limit and the insurer takes the rest. With a 10% floor and a 12% drop, you lose 10%. With a 30% drop, you still lose 10%.

A buffer protects well against ordinary corrections and poorly against crashes; a floor is the reverse. Gains are still capped. And if you surrender mid-term, the “interim value” formula in the prospectus decides what you receive, which can be less than the index change suggests. Read that section before anything else.

More than most investors expect, because the fees come in layers. A variable annuity holds mutual-fund-like subaccounts inside an insurance contract, so you pay the funds' own expenses plus the insurance charges on top (SEC):

• •Mortality and expense (M&E) charge. The SEC's example uses 1.25% a year of account value, which is $1,250 a year on $100,000.
• •Administrative fee. The SEC's example: 0.15% a year.
• •Underlying fund expenses, as with any mutual fund.
• •Rider fees for enhanced death benefits and “living benefits” such as guaranteed withdrawal or income benefits, each charged separately.
• •Surrender charges, for example 7% in year one falling by 1% a year, typically for six to eight years and sometimes ten. A common free-withdrawal allowance is 10% a year.

Bonus annuitiesadd 1% to 5% of your premium up front and recover it through higher fees or longer surrender periods. In the SEC's example, a $100,000 contract with a 4% bonus and 1.75% annual costs grows to $229,780 in ten years at a 10% gross return, while one with no bonus and 1.25% costs grows to $231,360. The bonus lost.

The most important sentence in the SEC's guidance is this one: “If you are investing in a variable annuity through a tax-advantaged retirement plan, you will get no additional tax advantage from the variable annuity.” A variable annuity inside an IRA pays insurance fees for a tax deferral the IRA already provides. The case for one outside an IRA is narrow: a high-income investor who has filled every other tax-advantaged account, has decades until withdrawal, and can buy a low-cost contract with no surrender charge. Those exist, sold by some firms directly to investors and through fee-only advisers.

It depends on whether the annuity is qualified or non-qualified, and on whether money comes out as annuitized payments or withdrawals. Annuity gains are always taxed as ordinary income, never at capital gains rates.

The exclusion ratio. For a life annuity bought with after-tax money, the IRS General Rule divides your cost by the “expected return”: the annual payment times a life-expectancy multiple from Table V of Publication 939. That percentage of each payment is tax-free. Once you have recovered your full cost, payments become fully taxable; if you die before recovering it, the unrecovered cost is deductible on your final return (IRS Publication 939). The worked example below does the arithmetic.

Withdrawals are last in, first out. For a non-qualified deferred annuity, “the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost” (IRS Publication 575). A $300,000 contract that has grown to $380,000 pays out $80,000 of fully taxable income before you touch a dollar of principal.

No step-up. Stocks held until death get a new cost basis and the gain escapes income tax. Annuities are carved out of that rule by name (26 U.S.C. §1014). For money you expect to leave to children, a deferred annuity converts what would have been untaxed gain into their ordinary income. Our estate planning basics guide covers which assets to leave and which to spend.

When you own an old annuity that is out of its surrender period and costs too much. Section 1035 lets you exchange one annuity for another without recognizing the gain, as long as the annuitant stays the same, and a partial exchange works if the money moves directly between insurers (IRS Publication 575). Your cost basis carries over. A common good use is moving a high-fee variable annuity, bought years ago, into a low-cost one, or into a SPIA once you want the income.

It is also the most abused transaction in the business. An exchange can charge surrender fees on the old contract and start a new surrender period on the new one, and the SEC tells investors to “consider the financial motivation your financial professional may have to recommend that you exchange one contract for another” (SEC). If you are told to exchange, ask for a side-by-side of the old and new contracts showing surrender charges, fees, death benefit and any living benefit you would give up, in writing.

Most annuities are sold on commission paid by the insurer and built into the product, so you never see an invoice. The SEC notes that contract fees may go toward the seller's compensation and that a seller may be paid more for some contracts, or some share classes of the same contract, than for others (SEC). You are entitled to ask what the seller will be paid, and you should.

The standard of care depends on who is selling and what:

• •Variable annuities and RILAs are securities. A broker-dealer recommending one to you must follow the SEC's Regulation Best Interest, in force since June 30, 2020: act in your best interest when making the recommendation, without putting its own interest ahead of yours (SEC).
• •Fixed, fixed index, MYGA and income annuities are insurance. State rules apply. In 2020 the National Association of Insurance Commissioners revised its annuity suitability model regulation to require recommendations in the consumer's best interest, with care, disclosure, conflict-of-interest and documentation obligations, including disclosure of the agent's role and compensation. As of August 2025, 49 jurisdictions had implemented it (NAIC); New York was not among them and has its own rule.
• •A registered investment adviser owes you a fiduciary duty for the whole relationship under the Investment Advisers Act (SEC), and a fee-only adviser is not paid by the insurer at all.

“Best interest” at the point of sale is not the same as an ongoing fiduciary duty, and neither makes a product cheap. Our guide on how to choose a financial advisor explains how to check registrations and ask how someone is paid.

Illustrative example: the people and figures below are hypothetical, not real clients. Numbers are calculated from the stated assumptions.

Carol is 67, widowed and retired. She has $2.0 million: $1.2 million in a traditional IRA, $650,000 in a taxable brokerage account and $150,000 in cash and Treasury bills. Social Security pays her $3,400 a month, or $40,800 a year. She spends about $96,000 a year, of which $70,000 is essential. An agent has proposed putting $300,000 of her taxable money into a fixed index annuity with an income rider. Before answering, she prices three plain alternatives for the same $300,000.

The SPIA's tax. Carol's expected return is $21,000 times the Table V multiple for age 67, which is 18.4 (IRS Publication 939): $386,400. Her exclusion percentage is $300,000 divided by $386,400, or 77.6%. So $16,296 of each year's $21,000 is tax-free and $4,704 is taxable, for about 18.4 years, until she is around 85 and a half. After that, all $21,000 is taxable. Had she used IRA money, all of it would be taxable from the first payment.

The MYGA. If she takes the $15,000 of interest each year, it is all taxable: withdrawals come out of earnings first. If she leaves it, the contract grows to $382,884 at 72, and the $82,884 gain is ordinary income when she withdraws it, or to her children if she dies holding it. It does not provide lifetime income; it is a tax-deferred CD with an insurer's guarantee.

The ladder vs. the SPIA. The SPIA pays $1,796 a year more than the ladder, and keeps paying after 92. The ladder keeps control and leaves money behind. That is the whole trade, and it shows up clearly in what each has paid, and what is left, at different ages of death:

What Carol decides. Her essential spending exceeds Social Security by $29,200 a year. A $300,000 SPIA would cover 72% of that gap for life, which is exactly the job an income annuity is for, and it would let her invest the rest of the portfolio with less fear of a bad decade. She declines the indexed annuity because she cannot compare its income rider to anything without the guaranteed payout figure, which the agent could not give her in writing. She buys a SPIA with $150,000 now, covering about 36% of the gap, and plans to price a second one at 72, when payout rates for her age will be higher. She also considers a QLAC with up to $210,000 of IRA money to start at 85, which would cover the years the ladder cannot. She runs the remaining $1.85 million through the retirement withdrawal calculator to see how much less the portfolio has to do with part of the floor guaranteed.

Ask these in writing and keep the answers with the contract:

1. What problem does this solve that a Treasury ladder, a bond fund or delaying Social Security does not?
2. How much will you be paid if I buy this, and is it more than for other products you could recommend?
3. Are you acting as a fiduciary, under Regulation Best Interest, or under my state's annuity best-interest rule?
4. What is the surrender schedule, year by year, and how much can I withdraw each year without a charge?
5. Which rates can the insurer change after I buy, how often, and what is the guaranteed minimum?
6. What is the total annual cost, including every rider, in dollars on my premium?
7. For an income rider: what guaranteed lifetime income, in dollars, do I get per year at each age I might start it?
8. What happens at my death, and how will my beneficiaries be taxed?
9. What is the insurer's financial strength rating, and what does my state's guaranty association cover?

Most annuity sales are legitimate, but the same pressure tactics show up in outright fraud aimed at retirees. Our guide to investment scam red flags shows how to verify a seller and a product in a few minutes.

• •Buying tax deferral you already have. An annuity inside an IRA adds no tax benefit; you pay for insurance features only.
• •Reading the income base as money. An income rider's roll-up rate grows a figure used to calculate withdrawals, not your cash value.
• •Comparing a cap to the index's total return. A 7% cap on a price index that excludes dividends is not “7% of the market.”
• •Exceeding the free withdrawal. Surrender charges apply to the excess, and on a non-qualified contract the withdrawal is taxed as earnings first.
• •Leaving a deferred annuity to heirs. With no step-up, the gain becomes their ordinary income; a brokerage account would have passed tax-free gains.
• •Life-only when someone depends on you. A life-only SPIA stops at your death; a spouse needs a joint and survivor option.
• •Going over the QLAC limit. The $210,000 limit counts all QLAC premiums across all your IRAs and plans.
• •Annuitizing everything at once. Buying in stages spreads interest-rate risk and gets a higher payout rate at older ages.
• •A 1035 exchange that restarts the clock. A new surrender period can cost more than the new contract's features are worth.