The clearest example of a fixed annuity is a Multi-Year Guarantee Annuity, or MYGA, which works much like a certificate of deposit issued by an insurance company instead of a bank. You hand over a lump sum, the insurer locks in a guaranteed interest rate for a set number of years, and at the end of the term you walk away with your original deposit plus every dollar of accumulated interest. As of early 2026, five-year MYGAs from well-rated insurers are offering guaranteed rates in the neighborhood of 5% to 6%.
A $100,000 MYGA, Start to Finish
Suppose you deposit $100,000 into a five-year MYGA with a guaranteed rate of 5.50%. The insurer contractually promises that rate for the entire five-year term. Your money compounds annually, and because annuities grow tax-deferred, no income tax is owed on the interest until you actually take the money out. At the end of five years, your account value would be roughly $130,700, representing about $30,700 in guaranteed interest.
During those five years, your balance is largely locked up. Most MYGAs let you pull out up to 10% of the account value each year without a penalty, but anything beyond that triggers a surrender charge. When the term ends, you typically get a short window to withdraw everything penalty-free, roll the money into a new annuity through a tax-free exchange, or accept whatever renewal rate the insurer offers for another term. If the renewal rate is disappointing, you can shop around.
The MYGA’s appeal is its simplicity. The rate doesn’t float, there’s no stock market exposure, and the math is predictable from day one.
Where Other Fixed Annuities Fit
Not every fixed annuity has a term-locked rate. A standard deferred fixed annuity credits a current interest rate that is typically guaranteed only for the first contract year, then resets annually based on market conditions. The contract also sets a guaranteed minimum rate that acts as a floor, influenced by the NAIC’s Standard Nonforfeiture Law, which ties the floor to Treasury rates and caps it at 3%.1National Association of Insurance Commissioners. Standard Nonforfeiture Law for Individual Deferred Annuities After the first year, you’re trusting the company to offer competitive renewal rates. A MYGA removes that uncertainty by locking the rate for the full term.
A Single Premium Immediate Annuity, or SPIA, flips the timeline altogether. There’s no accumulation phase. You hand over a lump sum and the insurer begins sending you income payments almost right away, usually within 30 days to one year of purchase.2Guardian Life. Single Premium Immediate Annuity (SPIA) The trade-off is permanence. Once you annuitize, the decision is generally irrevocable, and if you die earlier than expected, you may receive less in total payments than you originally deposited.
Some fixed annuities also include a market value adjustment clause that can raise or lower your surrender value based on interest rate movements since purchase.3USAA. Annuity Market Value Adjustment (MVA) If you plan to hold to the end of the term and stay within the annual free withdrawal allowance, the MVA never comes into play, but you should still check whether your contract has one.
Withdrawal Rules and Surrender Charges
Fixed annuities are designed to be held for years, and insurers enforce that expectation through surrender charges. If you cash out or pull more than the allowed free amount during the surrender period, you’ll pay a percentage-based penalty on the excess. A typical schedule starts around 7% in the first year and drops by one percentage point annually until it reaches zero, often by year seven or eight.4Insurance Information Institute. What Are Surrender Fees
Most contracts include a free withdrawal provision that lets you take out up to 10% of your account value each year without triggering a surrender charge.4Insurance Information Institute. What Are Surrender Fees The 10% is usually calculated based on the account value as of the previous contract anniversary. Some contracts also waive surrender charges entirely if you’re diagnosed with a terminal illness or confined to a nursing home, though these waivers vary by insurer and state.
If the annuity owner dies during the accumulation phase, the contract doesn’t vanish. Beneficiaries typically receive the full account value, which includes all premiums paid plus accumulated interest, minus any prior withdrawals and fees, and can usually take the money as a lump sum or elect periodic payments.5Guardian Life. How Do Annuity Death Benefits Work?
How Fixed Annuities Are Taxed
The central tax benefit of any fixed annuity is deferral. Interest compounds inside the contract without generating a tax bill each year, unlike a bank CD where you owe tax on interest annually, even if you don’t withdraw it. You pay tax only when money comes out.
For non-qualified annuities purchased with after-tax money, partial withdrawals before annuitization follow an income-first rule. The IRS treats every dollar you pull out as coming from the taxable interest first, not from your original premium.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts You don’t touch your tax-free principal until all the gains have been withdrawn and taxed as ordinary income.
Once you annuitize, each payment is split into a taxable portion and a tax-free return of your original premium, using what the IRS calls an exclusion ratio. The ratio equals your investment in the contract divided by the expected return over your lifetime.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Once you’ve recovered your entire investment, every subsequent payment becomes fully taxable.
Qualified annuities funded with pre-tax dollars, typically through a rollover from an IRA or employer retirement plan, work differently. Because the money was never taxed going in, every dollar that comes out is taxed as ordinary income. There is no exclusion ratio and no tax-free return of principal.
The 10% Early Withdrawal Penalty
If you pull taxable money out of any annuity contract before age 59½, the IRS adds a 10% penalty on top of the regular income tax, and the penalty applies to both qualified and non-qualified contracts.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Several exceptions exist, including distributions made after the owner’s death, distributions due to disability, substantially equal periodic payments spread over your life expectancy, and payments from immediate annuity contracts.7Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
Moving From One Annuity to Another
If you want to move from one annuity to another without triggering a taxable event, the tax code allows a direct transfer known as a 1035 exchange.8Office of the Law Revision Counsel. 26 U.S. Code 1035 – Certain Exchanges of Insurance Policies The critical requirements are that the funds move directly between insurance companies without you ever touching the money, and the same person must be the contract owner on both the old and new annuity.9Internal Revenue Service. Revenue Ruling 2003-76 If you take a check and then buy a new annuity yourself, the IRS treats the first transaction as a taxable withdrawal.
A 1035 exchange is the standard move when a MYGA term expires and a competitor is offering a better rate. The new contract may start a fresh surrender charge schedule, so you could be locking your money up for another multi-year period.
What Actually Guarantees Your Money
Fixed annuities are not bank products and are not insured by the FDIC. Your guarantee is only as strong as the insurance company standing behind the contract. This is the single biggest difference between a MYGA and a bank CD offering a similar rate, and it’s a difference many buyers overlook.
Every state operates a life and health insurance guaranty association that steps in when an insurer becomes insolvent. In most states, the coverage limit for annuity contracts is $250,000 in present value of benefits per person, with an overall cap of $300,000 across all policies you hold with the failed insurer.10NOLHGA. How You’re Protected These associations coordinate through NOLHGA, the National Organization of Life and Health Insurance Guaranty Associations, when a failure affects policyholders in multiple states. The limits vary somewhat by state, so check your own state’s guaranty association for the exact figures.
This backstop isn’t the same as FDIC insurance. Guaranty association funds come from assessments on surviving insurance companies, not from a standing government fund. Recoveries can take time, and if your annuity value exceeds the coverage cap, the excess is at risk.
Because the guarantee depends on the insurer’s ability to pay, the company’s financial strength rating is arguably the most important factor in your buying decision. A.M. Best, the primary rating agency for insurers, uses a scale where A++ and A+ are “Superior,” A and A- are “Excellent,” and B++ and B+ are “Good.”11AM Best. Guide to Best’s Financial Strength Ratings Ratings below B+ signal increasing vulnerability to adverse conditions. Most financial advisors recommend sticking with carriers rated A- or better, and if you’re placing a large amount, splitting it across two or more highly rated insurers keeps each contract within the state guaranty association limits.
MYGA vs. Bank CD
Both products offer guaranteed rates for a fixed term, but the differences matter. CD interest is taxed annually even if you don’t withdraw it, while MYGA interest grows tax-deferred until you pull it out. CDs are FDIC-insured up to $250,000 per depositor per bank, while MYGAs depend on the insurer’s claims-paying ability and the state guaranty association as a backup. CD early-withdrawal penalties are typically mild, often just a few months of interest, while MYGA surrender charges can run 5% to 7% or more in the early years. A MYGA might offer a slightly higher rate because of the longer lockup and the credit risk you’re accepting, but the higher rate comes with strings a CD doesn’t have.