Are Annuities Good or Bad?

Considering an annuity? Curious if annuities are good or bad investments? Before you buy into the sales spin, learn about the good and bad features of annuities.

Tax Status

  • Good: Funds in an annuity aren’t subject to income or capital gains taxes, which can keep more of your money working toward your retirement. (This is also why the US Securities and Exchange Commission cautions investors about putting annuities in IRAs—since IRAs already have this tax status, the annuity doesn’t provide you any additional tax benefit.)
  • Bad: Funds in an annuity aren’t tax-free, they are tax-deferred. When you withdraw money from an annuity, amounts above what you put in are taxed at ordinary income tax rates. This may be higher if not significantly higher than what you would pay without the annuity.

Guaranteed Income

  • Good: Guaranteed income for life can make you feel secure in your retirement and may actually benefit you, if you would have outlived your assets without it.
  • Bad: Insurance companies aren’t charities, and they structure these products to ensure the guarantee isn’t too taxing on them. One way they do this is by not inflation-adjusting annuity payments. Another is by charging high fees and/or crediting your annuity with low interest rates. Even if your financial professional tells you there are no charges for a fixed or equity-indexed annuity, remember: There is no such thing as a free lunch. Your return is probably much lower than what the insurance company is making on your money.


  • Good: Riders can offer customization to tailor the contract to hit multiple needs, providing a one-stop shop for insurance and other financial products.
  • Bad: For every rider or customization you add, it’s likely a separate fee is added on. Also, in most cases, receiving the advertised benefit requires you to annuitize the contract—surrender ownership of your principal to the annuity provider.

Liquidity and Surrender Fees

  • Good: There isn’t one.
  • Bad: If you annuitize, the decision is permanent. Even before you do that, getting out of an annuity you don’t want can be very costly due to surrender charges. These exit penalties can be significant and last for years. A typical variable annuity surrender fee schedule, for example would start at 7% in the first year you own the contract and decline by 1 percentage point annually until reaching zero.

Learn more about annuities in our Annuities Insights guide.