Two Phases, One Contract
An annuity has an accumulation phase and a payout phase. During accumulation you pay money in and it grows tax-deferred; during payout the insurer converts the balance into income. This calculator handles the first phase — the second is the Annuity Payout Calculator.
The tax treatment is the main draw. Growth inside an annuity is not taxed annually, so nothing is lost to tax drag along the way. The trade is that withdrawals come out as ordinary income rather than capital gains, and gains are withdrawn first.
The Types
- Fixed — the insurer guarantees a rate, typically for a set term. Predictable and modest, comparable to a CD with worse liquidity and better tax treatment.
- Variable — the balance follows sub-accounts you choose. Higher potential return, and the fee layer is the heaviest of the three.
- Indexed — return is linked to an index with a cap and a floor. Marketed as market upside without downside; the caps and participation rates usually mean a fraction of the index return.
Fees Are the Deciding Factor
A variable annuity can carry a mortality and expense charge of 1.0–1.5%, sub-account fees of 0.5–1.0%, an administrative fee, and riders at 0.5–1.5% each. Total costs of 2.5–3.5% a year are common.
Against a 5% gross return, a 1.2% fee removes about 21% of the total growth over 15 years; a 3% fee removes closer to half. The tax deferral has to beat that drag before the contract is worth holding, which is why annuities are generally recommended only after 401(k) and IRA space is fully used.
Surrender Charges
Most contracts impose a surrender charge for early withdrawal, commonly starting at 7% and declining by one point a year. Free withdrawal provisions typically allow 10% of the balance annually without charge. Before 59½ a 10% federal penalty applies to gains on top of income tax, mirroring retirement account rules.
Where an Annuity Fits
The honest case for one is narrow but real: a saver who has maxed out tax-advantaged accounts, wants more tax deferral, values guaranteed income over legacy, and is buying a low-cost fixed or immediate contract. The case against is everything else — fees, complexity, and illiquidity that most investors do not need to accept.
Frequently Asked Questions
Are annuities safe?
They are backed by the issuing insurer, not by the FDIC. State guaranty associations provide a backstop, usually $250,000–$500,000 depending on the state. The insurer's credit rating matters.
Can I lose money in an annuity?
In a variable annuity, yes — the sub-accounts can fall. In a fixed annuity the principal is guaranteed by the insurer, though surrender charges can still return less than you paid if you exit early.
Is an annuity better than an index fund?
For growth, rarely — the fee difference is too large. For guaranteed lifetime income, an annuity does something a fund cannot: it pools longevity risk, so it can pay more than a portfolio safely can.