Annuities Deep Dive: Every Type Explained for Retirement Income Planning

Single Premium Immediate Annuity (SPIA)

A SPIA is the simplest annuity product: you give an insurance company a lump sum, and it begins sending you a monthly check immediately (or within 30 days). The payment amount is fixed at purchase based on your age, sex, premium amount, and current interest rates. It lasts for life — or for a defined period such as 10 or 20 years.

Payout options:

• Life-only: Highest monthly payment. Payments stop at death, even if you die shortly after purchase — the "longevity bet" in its purest form.
• Joint-and-survivor: Continues at full or reduced amount to a spouse after the primary annuitant dies. Common for married couples.
• Life with period certain: Payments guaranteed for at least a defined period (e.g., 10 or 20 years) regardless of when you die. Reduces monthly payment but ensures some benefit reaches heirs.
• Cash refund / installment refund: If you die before receiving back your entire premium, the remainder goes to beneficiaries. Reduces monthly income.

Tax treatment: For non-qualified (after-tax) money, each SPIA payment is partially return of principal (not taxed) and partially interest (taxed as ordinary income). The IRS "exclusion ratio" determines the breakdown. Payments from IRA-funded SPIAs are fully taxable.

Best for: Retirees with limited pension income who need a reliable monthly "paycheck," especially those with longevity risk (family history of long life) and who can fund basic expenses without needing the lump sum back.

Deferred Income Annuity (DIA)

A DIA works like a SPIA, but income begins at a future date — often 5, 10, or 15 years after purchase. Because the insurance company holds the premium for years before payments start, the eventual monthly income is dramatically higher per dollar of premium compared to a SPIA purchased at the same age. This makes DIAs highly efficient as longevity insurance.

Example: A 65-year-old who buys a DIA today with income starting at 80 might receive $1,200–$1,500/month for a $100,000 premium. The same $100,000 in a SPIA at 65 might produce $500–$600/month. The deferred start date is where the actuarial math works powerfully.

Strategy: DIAs are often used as "income insurance" for late life — securing a guaranteed income floor that begins at age 80 or 85, freeing the portfolio to handle spending from 65 to 80 without the anxiety of running out of money in the 80s or 90s.

Best for: Retirees in their 60s who want to lock in a guaranteed income floor for late life without tying up the entire portfolio — think of it as late-life income insurance funded at age 65.

Qualified Longevity Annuity Contract (QLAC)

A QLAC is a specific type of DIA purchased inside a traditional IRA or 401(k). What makes it unique is its RMD treatment: assets used to fund a QLAC are excluded from the RMD calculation until income begins — which can be deferred until age 85. This means a QLAC simultaneously provides longevity income and reduces current taxable RMD income.

2025 QLAC limit: You can fund a QLAC with up to $200,000 (indexed for inflation) from your qualified retirement accounts. That $200,000 is excluded from RMD calculations until payments begin, potentially reducing your annual taxable income meaningfully during the deferral period.

Tax treatment: QLAC income payments are fully taxable as ordinary income — no exclusion ratio since the premium came from pre-tax IRA funds. The benefit is the RMD deferral and the high income-per-dollar when payments eventually start.

Best for: Retirees who are concerned about runaway RMDs from large traditional IRA balances and want to simultaneously reduce current taxable income while locking in a guaranteed income stream for late life.

Multi-Year Guaranteed Annuity (MYGA)

A MYGA is essentially an annuity-wrapped CD. It credits a guaranteed interest rate for a fixed number of years (commonly 3, 5, or 7 years) and then matures. Unlike a SPIA or DIA, a MYGA does not necessarily produce income — it accumulates value. At maturity, you can withdraw the accumulated amount, renew, or convert to income.

MYGAs are particularly attractive when interest rates are high, as they can lock in yields that exceed what CDs or short-term Treasuries offer, with tax deferral on the interest accumulation. They are simple, transparent, and carry none of the complexity of indexed or variable products.

Tax treatment: Interest inside a MYGA accumulates tax-deferred. Withdrawals are taxed as ordinary income on the gain portion (LIFO — last in, first out). If held inside a traditional IRA, all withdrawals are taxable.

Best for: Conservative retirees who want to earn more than a CD on safe money, defer taxes, and are comfortable locking funds up for 3–7 years. Useful as part of a bond-alternative allocation in the fixed-income portion of a retirement portfolio.

Fixed Indexed Annuity (FIA)

An FIA credits interest based on the performance of a market index (commonly the S&P 500), subject to a cap (maximum gain per period) and a floor (minimum of 0% — you cannot lose money due to market declines). The insurer does not invest your premium in the index; it uses options to produce index-linked returns while protecting principal.

FIAs are sold both as accumulation vehicles and, with an optional Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, as income generators. The GLWB rider provides a separate "income account value" that grows at a guaranteed rate (e.g., 6–8%/year) and can eventually be used to calculate a lifetime withdrawal income stream — regardless of what the actual account value is.

Key terms to understand in an FIA:

• Cap rate: The maximum index gain credited in a period (e.g., 10% cap means if the index gains 18%, you get 10%).
• Participation rate: The percentage of the index gain you receive (e.g., 80% participation on a 12% gain = 9.6%).
• Spread: An amount deducted from index gains (e.g., 2% spread on 12% index gain = 10% credited).
• Floor: Usually 0% — your account cannot decline due to index losses.
• GLWB rider: An optional add-on (typically costing 0.5–1.5%/year of benefit base) that guarantees a lifetime income amount regardless of investment performance.

Best for: Retirees who want some market upside potential but cannot tolerate principal loss, and who may benefit from a GLWB rider to generate lifetime income while maintaining a nominal account value. Must be understood in full detail before purchase — the complexity creates many opportunities for misrepresentation.

Variable Annuity (VA)

A variable annuity invests your premium in subaccounts — mutual-fund-like options — and your account value rises and falls with those investments. The insurance wrapper adds tax deferral and, usually, a death benefit guarantee (the beneficiary receives at least the original premium even if the account has lost value).

Like FIAs, VAs are often sold with GLWB or GMIB (Guaranteed Minimum Income Benefit) riders that promise a certain level of lifetime income regardless of investment performance. However, these riders carry fees typically ranging from 0.5–2.0%/year, on top of already high subaccount expense ratios (0.5–1.5%/year) and contract fees (0.1–0.5%/year). Total annual costs of 2–4% are common.

Critical consideration: High fees are the defining weakness of traditional VAs. A portfolio returning 7%/year in a VA with 3%/year in total fees nets only 4% — the same return a conservative bond allocation might achieve, with far more risk and far less flexibility. The tax deferral benefit must be weighed against this cost, especially for investors who are already tax-advantaged (inside an IRA).

Best for (narrow use case): High-income investors who have maxed all other tax-advantaged accounts and want additional tax deferral on investments. The tax cost of VA gains (ordinary income vs. capital gains) vs. a taxable brokerage account must be modeled carefully. Rarely optimal for most retirees.