What Is a Deferred Annuity?
A deferred annuity is designed around two distinct phases: an accumulation phase during which your money grows, and a distribution phase during which you receive income or withdraw funds. The word "deferred" refers to the fact that income — and income tax on earnings — is postponed to a later date.
Types of Deferred Annuities
The main types differ in how your money grows during accumulation:
- Fixed deferred annuity: Earns a declared interest rate, similar to a bank CD but with tax deferral and insurance company backing.
- Fixed indexed annuity (FIA): Interest credited is linked to an index like the S&P 500, with downside protection through a floor.
- Multi-year guaranteed annuity (MYGA): A type of fixed annuity with a locked-in rate for a set term.
- Variable annuity: Invested in subaccounts similar to mutual funds. Not covered on this site as it carries market risk.
The Tax Deferral Advantage
In a deferred annuity, your earnings grow without being taxed each year. You only pay ordinary income tax when you withdraw. This compounding of untaxed growth can meaningfully accelerate accumulation compared to a taxable account — particularly for individuals in higher tax brackets.
Accessing Your Money
Deferred annuities typically allow penalty-free withdrawals up to 10% of the accumulation value per year. Larger withdrawals during the surrender period trigger surrender charges. After the surrender period ends, the full value is accessible (subject to income tax on earnings).