Are Annuities a Good Investment?

Christian Worstell
In this article...
  • Discover the pros and cons of investing in annuities. Learn about guaranteed income, tax deferral, commissions, fees and more to decide if are annuities a good investment for your retirement.

Are annuities a good investment? Making an informed decision on this important topic requires careful consideration of the pros and cons, tax implications, and alternative options for annuities.

Annuities can offer some attractive features such as guaranteed income and tax deferral, depending on the type of annuity. But they can also come with commissions, annuity fees and surrender charges that should not be overlooked.

In this guide, we'll explore the pros and cons of investing in annuities, discuss their tax implications, look at alternatives to consider and provide strategies for making an informed decision about your retirement savings.

Table of Contents:

What Are Annuities?

Annuities offer a reliable flow of income across time periods and can be employed as an investment option or retirement strategy. They can be used as an investment vehicle, retirement planning tool or both. Annuities come in many different forms and have various features depending on the type chosen.

  • Fixed annuities promise a guaranteed payout over a fixed term – e.g., 10+ years – with consistent monthly sums regardless of market conditions. 

    During the pre-determined span of the annuity account, a fixed sum will be disbursed each month by the insurer regardless of market conditions. This makes fixed annuities ideal for those who want to ensure their money is safe from market volatility and also receive regular income payments during retirement years.

  • Variable annuities afford investors opportunities for greater return on their initial investment amount than a fixed annuity might, albeit at a greater risk of losses due to market fluctuation.

  • Indexed annuities tie your returns to stock indices such as the S&P 500 without actually investing in them, so you don't need to fret about losses due to sudden market dips.

    These policies also offer potential growth opportunities if markets soar over time, though gains may typically be limited by a pre-agreed upon participation rate or cap rate. Moreover, they often come with guaranteed minimum interest rates (GMIRs) so you know what kind of return you'll get regardless of how stocks behave. 

    Some indexed annuities may offer bonuses paid out after holding the annuity contract for certain periods (typically 5+ years), providing an added sweetener on top.

  • Immediate annuities are designed specifically for retirees looking for immediate cash flow rather than future returns on investments. They provide guaranteed monthly income streams and liquidity starting right away based on lump sum contributions made upfront.

    Immediate Annuity policies may also include optional inflation protection riders that increase payout amounts annually according to changes in consumer price index (CPI), helping keep up with rising cost-of-living expenses during retirement years too.

An insurance company offering annuity retirement accounts may offer certain additional perks, such as:

  • Death benefit protection that pays out beneficiaries if the investor passes before receiving all scheduled payments

  • Living benefit riders that guarantee minimum withdrawal amounts regardless of market performance

  • Long-term care riders help cover costs not covered by health insurance plans or Medicare

Before investing in annuities, it is important to consider the associated risks and potential rewards and financial strength of an investment. With that in mind, let's take a look at some of the pros and cons of annuities as an investment option.

Key Takeaway: Annuities can offer a range of benefits and features, such as guaranteed steady income, potential growth opportunities and death benefit protection. Different types of annuities include fixed annuities, variable annuity accounts, immediate annuities and others.

Pros and Cons of Annuities

Annuities may present a potential avenue for financial stability during retirement, however they are not without their own risks. Comprehending the advantages and drawbacks of annuities is imperative prior to investing.

Annuity Pros

Annuities offer a guaranteed lifetime income stream or income for a set period of time that cannot be outlived. They can also offer tax advantages, as money put into an annuity can grow tax-deferred until it is withdrawn, depending on the type of annuity.

Annuity Cons

One downside to annuities is the high fees and commissions which can significantly reduce returns if you withdraw funds before the maturity date of the contract. These are typically called surrender charges, so make sure you understand these terms before committing any money to an annuity contract.

Another potential issue is liquidity. Once money has been invested in an annuity, it typically cannot be accessed quickly like other investments such as stocks or mutual funds, since there may be penalties for early withdrawal. Some annuities may also limit how much you can withdraw at one time.

Weighing the taxation ramifications linked to annuity investments is also a critical factor.

Key Takeaway: Annuities may be a viable path to ensure financial stability during retirement. They can offer tax advantages, death benefits and guaranteed income, but they can also come with high fees, surrender charges and limited liquidity options.

Tax Implications of Annuities

Depending on the type of annuity, funds can be allocated either pre-tax or post-tax.

  • Qualified annuities are funded with pre-tax dollars, which means your contributions aren't taxed at the time they're invested in the annuity. You don't pay taxes on a qualified annuity until you make a withdrawal.

  • Qualified annuities offer the potential for greater returns than nonqualified annuities, which are funded with after-tax dollars. Your contributions to a non-qualified annuity are made with dollars you've paid taxes on, and you must pay taxes on all earnings within the account each year regardless of whether you make withdrawals.

The taxation of distributions from both qualified and non-qualified annuity accounts is determined by two factors: how long you’ve held your account and how much money you contributed as your original investment amount (i.e., basis).

If you make withdrawals on an annuity before age 59 ½, it may incur an additional 10% penalty in addition to any applicable federal and state income taxes due at the time of distribution. However, some annuity contracts may offer exceptions such as the immediate need for funds due to medical expenses or disability that allow for early withdrawal without penalty.

Leveraging the IRS rules governing retirement plans and IRAs, one may be able to "ladder" or annuitize withdrawals from qualified accounts to minimize their tax burden.

If distributions exceed basis (contributions), then these amounts become taxable income in accordance with current federal and state rates. Furthermore, opting for a life expectancy payout rather than a lump sum can allow only the portion related to principal (basis) to be excluded from gross income while the remaining interest-related portion must still be reported as ordinary income.

For nonqualified accounts, all gains realized within the account will be taxed at ordinary income rates with no exceptions, regardless of whether distributed via lump sum payment or lifetime payout option.

In summary, it is important for investors considering purchasing an annuity contract to understand its associated tax implications prior to making a decision so they can maximize their return on investment while minimizing potential liability exposure to Uncle Sam.

Key Takeaway: It's important to understand the tax implications of qualified and nonqualified annuity accounts before investing.

Alternatives to Annuities

Investors may wish to look into other options that may provide similar advantages to annuities but with a lower level of risk. 

  • Certificates of Deposit (CDs) provide a secure return on investment, with comparatively low risk levels and the option to hold for varying periods of time according to issuer stipulations. Generally speaking, longer-term CDs will have higher interest rates than short-term ones but come with early withdrawal penalties if you need to access the. money before the CD's account maturity date.

  • By investing in mutual funds, individuals can gain ownership of a variety of stocks, bonds or other investments. They generally offer greater returns than CDs but also carry more risk since they’re tied to market performance and can fluctuate greatly over time.

  • Exchange-traded funds (ETFs) are investment vehicles which tend to concentrate on particular sectors, such as tech or energy, rather than diversifying across various industries like mutual funds.

    ETFs often have lower fees associated with them compared to mutual funds, which can make them attractive for long-term investors looking for diversification without breaking the bank.

  • Real estate investment trusts (REITs) provide a way for investors to enter the real estate market without having to own any physical property. With an REIT, you invest in trusts which possess multiple properties and yield returns from rent payments and capital growth upon sale.

    REITs tend to be less risky than direct real estate investments since you don’t need large amounts of capital up front. REITs can offer some tax advantages due their structure as publicly traded companies under certain conditions.

Other investment options exist for those who don't want to purchase annuities. However, if you decide that an annuity is the right choice for your financial goals and risk tolerance, it's important to understand how they work before investing in one.

Key Takeaway: For those considering retirement investments, annuities are but one of many potential choices, such as CDs, mutual funds, ETFs or REITs which may offer varying levels of risk and return.

Strategies for Investing in Annuities

When it comes to investing in annuities, various techniques exist that can assist you in obtaining the best returns and picking an ideal product for your requirements.

  • First, consider the type of annuity you’re interested in purchasing. When selecting an annuity, you may choose from fixed-rate, variable rate, indexed, immediate income or deferred income options – each of which has its own benefits and drawbacks.

  • Once you have determined the type of annuity that suits your needs, review all available options from different insurance companies and annuity providers and compare their fees and features before making a decision.

  • Annuity distributions are taxed differently than other types of retirement accounts, so make sure to research these details before committing to a plan or policy. Get help planning for tax-deferred savings by working with a licensed financial professional.

Another key factor when selecting an investment strategy is determining how long you want the money invested. This could range from short-term savings goals up through long-term retirement planning objectives.

Generally speaking, fixed rate instruments offer more stability while variable rate products tend to provide higher returns over time but also carry greater risks due to market fluctuations. Indexed products allow investors some flexibility between these two extremes depending on their desired outcome profile within specific markets or sectors they’re targeting for growth opportunities.

Annuity and Investment FAQs

Are annuities a good investment right now?

The answer to this question depends on the individual's financial situation, risk tolerance and goals. Generally speaking, annuities can be a good investment for those looking for guaranteed income in retirement. Annuities provide a steady stream of payments that are backed by an insurance company which helps protect against market volatility and inflation.

Nevertheless, prior to committing to an annuity, it is essential to thoroughly comprehend all its components as they may not be appropriate for everyone given their intricate structure and long-term scope.

Why are annuities not a good investment?

Annuities often come with hefty costs and charges if you withdraw money early. These fees can drastically reduce potential earnings, making them an unwise choice for most investors.

Additionally, annuities come with long-term contracts that may be difficult to break if the investor’s needs or goals change over time. Furthermore, annuity income can be subject to taxation at a higher rate than other investments such as stocks and bonds, depending on the type of annuity.

How Much Does a $100,000 Annuity Pay Per Month?

A $100,000 annuity typically pays anywhere from $400 to $600 per month. The amount received from an annuity is contingent upon various elements, such as the type of annuity, age, rate of return, fees and taxes.

Compare diverse annuity choices from various different annuity providers prior to settling on a decision so you can find one that best fits your needs.


In conclusion, investing in annuities can be a great way to secure guaranteed income and tax deferral for retirement. Before investing in annuities, it is essential to consider the advantages and disadvantages of this type of investment alongside other potential options such as stocks or bonds.

Take control of your financial future and learn more about annuities as a potential investment option.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at

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