Example of a Fixed Annuity and How It Works: A $100,000 MYGA

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, Step by Step

Say you deposit $100,000 into a five-year MYGA with a guaranteed rate of 5.50%. The insurer contractually promises that rate for the full five years. Your money compounds annually, and because annuities grow tax-deferred, you owe no income tax on the interest until you actually take the money out. At the end of five years, your account value would be roughly $130,700, with about $30,700 in guaranteed interest.

During those five years, the 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 above 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 disappoints, 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 the MYGA Sits Among Fixed Annuities

Standard Deferred Fixed Annuity

A standard deferred fixed annuity works on the same principle as a MYGA, but with a less rigid rate structure. The insurer credits a current interest rate that is typically guaranteed for the first year of the contract, then resets it annually based on market conditions. The contract also establishes a guaranteed minimum rate that acts as a floor. No matter what happens in the economy, the insurer cannot credit less than that minimum for the life of the contract.¹

After the first-year rate expires, the insurer sets a renewal rate for the next period. You’re trusting the company to offer competitive renewal rates going forward, which is why insurer reputation matters. A MYGA avoids this uncertainty by locking the rate for the full term.

Single Premium Immediate Annuity

A SPIA flips the timeline. Instead of accumulating over years, you hand over a single lump sum and the insurer begins sending you income payments almost right away, usually within 30 days to one year of purchase.² There’s no accumulation phase. The product exists to convert a pile of money into a guaranteed paycheck, which makes it popular with people who’ve just retired and want to cover fixed expenses for life.

The trade-off is permanence. Once you annuitize, the decision is generally irrevocable. You’ve exchanged control of that capital for the certainty of income, and if you die earlier than expected, you may receive less in total payments than you originally deposited, depending on the payout option you chose.

How the Guaranteed Rate Actually Works

Every fixed annuity contract has two rates working in tandem. The current rate is what the insurer credits to your account. The guaranteed minimum rate is the contractual floor below which your credited rate can never fall. For a standard deferred fixed annuity, the insurer typically guarantees the current rate for the first contract year, then adjusts it annually, but every renewal rate must stay at or above the minimum.³

A MYGA simplifies this by making the current rate and the guaranteed rate the same number for the entire term. Buy a five-year MYGA at 5.50%, and 5.50% is both your current rate and your guarantee for all five years.

Market Value Adjustments

Some fixed annuities include a market value adjustment clause that can raise or lower your surrender value based on interest rate movements since you bought the contract. If rates have risen since your purchase date and you withdraw more than the annual free amount before the term expires, the MVA reduces your payout. The insurer’s underlying bond portfolio has lost value, and they pass part of that loss to you. If rates have fallen instead, the MVA works in your favor and you get back more than the base surrender value.⁴

Not every fixed annuity has an MVA, so check the contract before you buy. Products with MVA clauses sometimes offer slightly higher initial rates as compensation. 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.

Getting to Your Money Before the Term Ends

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 free amount during the surrender period, you 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.⁵

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.⁵ The 10% is usually based on the account value as of the previous contract anniversary. Some contracts also waive surrender charges entirely for a terminal illness diagnosis or nursing home confinement, though these waivers vary by insurer and state.

Tax Treatment

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.

How Withdrawals Are Taxed

For non-qualified annuities purchased with after-tax money, partial withdrawals before annuitization follow an income-first rule under the tax code. The IRS treats every dollar you pull out as coming from the taxable interest first, not from your original premium.⁶ You don’t touch your tax-free principal until all the gains have been withdrawn and taxed as ordinary income.

Once you annuitize, the math changes. 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 total investment in the contract divided by the expected return over your lifetime.⁶ If you invested $100,000 and the expected total payout is $200,000, half of each payment is tax-free. After you’ve recovered your entire investment, every subsequent payment becomes fully taxable.

Qualified vs. Non-Qualified

The funding source changes everything. A qualified annuity is bought with pre-tax dollars, typically through a rollover from an IRA or employer plan. Because that money was never taxed going in, every dollar coming out is taxed as ordinary income. There is no exclusion ratio and no tax-free return of principal.

A non-qualified annuity is bought with money you’ve already paid taxes on. Only the interest earnings are taxable, and your original premium comes back tax-free, either through the withdrawal ordering rules or the exclusion ratio.

The 10% Early Withdrawal Penalty

Pull taxable money out of any annuity contract before age 59½ and the IRS adds a 10% penalty on top of the regular income tax. The penalty applies to both qualified and non-qualified contracts.⁶ Several exceptions exist: 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 are all exempt.⁷

Moving to a Different Annuity Without a Tax Bill

To move from one annuity to another without triggering a taxable event, the tax code allows a direct transfer known as a 1035 exchange.⁸ The critical requirements: 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.⁹ Take a check and buy the new annuity yourself and the IRS treats the first transaction as a taxable withdrawal. Your cost basis carries over to the new contract proportionally.

A 1035 exchange is the standard move when a MYGA term expires and a competitor is offering a better rate. Just remember the new contract may start a fresh surrender charge schedule, so you could be locking your money up for another multi-year period.

Turning the Account Into Income

When you’re ready to convert your accumulated value into income, the process is called annuitization. You give up access to the lump sum in exchange for a guaranteed stream of payments. The payout option you choose determines how much you receive each month and what happens to any remaining value after you die.

Life only pays the highest monthly amount because the insurer’s obligation ends the moment you die. No payments to beneficiaries, no residual value.
Life with period certain guarantees payments for your lifetime, but also for a minimum period, such as 10 or 20 years. If you die in year six of a 20-year certain period, your beneficiary collects the remaining 14 years. The monthly amount is lower than life-only because the insurer takes on more risk.
Joint and survivor keeps payments going as long as you or your spouse is alive. The monthly amount is typically reduced after the first spouse dies.

Some insurers offer a cost-of-living adjustment rider that increases your payments by a fixed percentage or ties them to the Consumer Price Index. The protection sounds appealing, but it has a real cost: your initial payments will be noticeably lower because the insurer is pricing in decades of increases. Over a long retirement the rider can pay off. Over a short one you may collect less total income than a flat payment would have delivered.

How Safe Is the Guarantee

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 many buyers overlook it.

State Guaranty Associations

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.¹⁰ These associations coordinate through NOLHGA, the National Organization of Life and Health Insurance Guaranty Associations, when a failure affects policyholders in multiple states. Limits vary somewhat by state, so check your own state’s guaranty association for the exact figures.

This backstop matters, but it isn’t the same as FDIC insurance. Guaranty association funds come from assessments on surviving insurers, not from a standing government fund. Recoveries can take time, and if your annuity value exceeds the coverage cap, the excess is at risk.

Insurer Financial Strength

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 uses a scale where A++ and A+ are “Superior,” A and A- are “Excellent,” and B++ and B+ are “Good.”¹¹ Ratings below B+ signal increasing vulnerability to adverse conditions. Most 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 state guaranty 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; MYGA interest grows tax-deferred until you pull it out. CDs are FDIC-insured up to $250,000 per depositor per bank; MYGAs depend on the insurer’s claims-paying ability, with the state guaranty association as a backup. CD early-withdrawal penalties are typically mild, often 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 that a CD doesn’t have.

1
National Association of Insurance Commissioners. Standard Nonforfeiture Law for Individual Deferred Annuities
2
Guardian Life. Single Premium Immediate Annuity (SPIA)
3
Guardian Life. What is a Fixed Annuity and How Does it Work?
4
USAA. Annuity Market Value Adjustment (MVA)
5
Insurance Information Institute. What Are Surrender Fees
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
7
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
8
Office of the Law Revision Counsel. 26 U.S. Code 1035 – Certain Exchanges of Insurance Policies
9
Internal Revenue Service. Revenue Ruling 2003-76
10
NOLHGA. How You’re Protected
11
AM Best. Guide to Best’s Financial Strength Ratings