Annuities decoded: what they are, how they grow, and who actually benefits from them (and why they’re making a comeback)
Understand annuities in plain English—including tax treatment, income options, risks, and real-world use Meta Description: Explore how annuities work—including fixed, indexed, and deferred types—and learn how they’re taxed, how they grow, and whether they’re right for your retirement.
Truthifi Editors
Published
Jul 14, 2025
5 min
Annuities can be confusing—but they don’t have to be.
If you're planning for retirement or just trying to understand your options for guaranteed income, it's worth knowing what annuities are, how they work, and whether they make sense for you.
Let’s break it down in plain English—because once you understand how annuities work, you’ll be better equipped to protect your savings, reduce tax surprises, and generate income that lasts. Truthifi's education center offers helpful breakdowns like this and more.
What exactly is an annuity—and why are so many people talking about them?
An annuity is a financial contract between you and an insurance company. You invest money (either as a lump sum or through a series of payments), and in return, the company agrees to pay you income either now or in the future.
Annuities are often used for retirement planning because they can offer (FINRA overview):
Tax-deferred growth
Guaranteed income streams
Protection against market downturns
There are several types of annuities, and they all work a little differently. That’s where many people get confused—so let’s walk through the most common ones.
Let’s talk safety: what is a fixed annuity and who might want one?
A fixed annuity provides a guaranteed interest rate for a set period of time. It’s simple, predictable, and easy to understand. You give the insurer your money, and they promise to pay you back with interest.
This option is often used by conservative investors who want a safe place to grow their money with a predictable return. Learn more about fixed annuities at the National Association of Insurance Commissioners (NAIC). Truthifi's investment monitoring features can help you compare these predictable returns with other low-risk assets in your portfolio.
Curious about market-linked growth? Here's what a fixed index annuity really does
A fixed index annuity (FIA) combines the safety of a fixed annuity with the potential growth of the stock market.
Instead of earning a flat interest rate, your return is tied to the performance of a market index, such as the S&P 500. Your principal is protected from loss, but your upside is limited by certain features like caps, participation rates, or margins (Investopedia guide).
But wait—what is a margin on an indexed annuity, and how does it affect your returns? It’s a percentage that gets subtracted from the index gains before your return is credited. For example, if the index goes up 10% and the annuity has a 2% margin, you’d earn 8%.
Wondering how indexed annuities differ from fixed ones? Here’s the breakdown
Here’s a quick breakdown:
Feature | Fixed Annuity | Fixed Index Annuity |
|---|---|---|
Growth | Guaranteed rate | Tied to index performance |
Risk | No market exposure | No downside risk, but capped upside |
Complexity | Simple | More complex due to index formulas |
Bottom line? Indexed annuities offer the potential for higher returns than fixed annuities, but with more variables to understand. Truthifi’s fee transparency and performance tools let you analyze how indexed annuities stack up versus other options.
How do deferred annuities work—and why do they appeal to long-term savers?
A deferred annuity is an annuity that delays income payments until a future date. You invest during the accumulation phase, and then begin receiving income later—often in retirement.
One major benefit? Interest earnings accumulate tax-deferred, meaning you don’t pay taxes on growth until you withdraw funds. This can make a big difference for long-term savers—and it’s one reason many advisors recommend deferred annuities for tax-sensitive retirement planning. This guide on how to manage your wealth offers more long-view tips like this.
Non-qualified annuities explained: what they are and how they’re taxed
A non-qualified annuity is funded with after-tax dollars. It’s not part of a 401(k) or IRA. Because you already paid taxes on the money going in, only the earnings are taxable when withdrawn.
This is different from a qualified annuity, which is funded with pre-tax dollars inside a retirement account and is fully taxable upon withdrawal.
Taxes and annuities: what you really need to know before you buy
Let’s clear this up:
Are annuities given favorable tax treatment? Yes, earnings grow tax-deferred.
Is annuity income taxable? Yes, when you withdraw funds, earnings are taxed as ordinary income. In non-qualified annuities, only the earnings portion is taxed.
Understanding the tax treatment is key to choosing the right annuity type for your goals. The IRS offers guidance on tax rules for annuities. Truthifi's portfolio tools can help you see how those tax differences play out across your full investment picture.
Are annuities safe—and are they a smart investment strategy?
Annuities are generally safe because they’re backed by the financial strength of insurance companies. Morningstar research explores which types of annuities offer the best protection and value. Some offer principal protection, which can be appealing in volatile markets.
But whether they’re a good investment depends on your needs. They’re not designed to maximize returns. They’re meant to provide income stability, tax deferral, and peace of mind.
Pro tip: You can use Truthifi’s investment tracking and monitoring tools to compare annuities to other retirement strategies and evaluate total portfolio risk.
Final thoughts: are annuities the right piece in your retirement puzzle?
Annuities aren’t right for everyone. But they can be a smart part of a retirement plan—especially if you’re looking for predictable income and tax deferral.
Still have questions? This is where it helps to have the right tools and clarity. Truthifi’s wealth management guide offers deeper insights into how annuities, IRAs, and tax strategies all work together. Or dive into Truthifi’s features to compare advisor recommendations and see if your annuity strategy fits your broader financial goals.
Read next from the Truthifi Blog
Annuities can be confusing—but they don’t have to be.
If you're planning for retirement or just trying to understand your options for guaranteed income, it's worth knowing what annuities are, how they work, and whether they make sense for you.
Let’s break it down in plain English—because once you understand how annuities work, you’ll be better equipped to protect your savings, reduce tax surprises, and generate income that lasts. Truthifi's education center offers helpful breakdowns like this and more.
What exactly is an annuity—and why are so many people talking about them?
An annuity is a financial contract between you and an insurance company. You invest money (either as a lump sum or through a series of payments), and in return, the company agrees to pay you income either now or in the future.
Annuities are often used for retirement planning because they can offer (FINRA overview):
Tax-deferred growth
Guaranteed income streams
Protection against market downturns
There are several types of annuities, and they all work a little differently. That’s where many people get confused—so let’s walk through the most common ones.
Let’s talk safety: what is a fixed annuity and who might want one?
A fixed annuity provides a guaranteed interest rate for a set period of time. It’s simple, predictable, and easy to understand. You give the insurer your money, and they promise to pay you back with interest.
This option is often used by conservative investors who want a safe place to grow their money with a predictable return. Learn more about fixed annuities at the National Association of Insurance Commissioners (NAIC). Truthifi's investment monitoring features can help you compare these predictable returns with other low-risk assets in your portfolio.
Curious about market-linked growth? Here's what a fixed index annuity really does
A fixed index annuity (FIA) combines the safety of a fixed annuity with the potential growth of the stock market.
Instead of earning a flat interest rate, your return is tied to the performance of a market index, such as the S&P 500. Your principal is protected from loss, but your upside is limited by certain features like caps, participation rates, or margins (Investopedia guide).
But wait—what is a margin on an indexed annuity, and how does it affect your returns? It’s a percentage that gets subtracted from the index gains before your return is credited. For example, if the index goes up 10% and the annuity has a 2% margin, you’d earn 8%.
Wondering how indexed annuities differ from fixed ones? Here’s the breakdown
Here’s a quick breakdown:
Feature | Fixed Annuity | Fixed Index Annuity |
|---|---|---|
Growth | Guaranteed rate | Tied to index performance |
Risk | No market exposure | No downside risk, but capped upside |
Complexity | Simple | More complex due to index formulas |
Bottom line? Indexed annuities offer the potential for higher returns than fixed annuities, but with more variables to understand. Truthifi’s fee transparency and performance tools let you analyze how indexed annuities stack up versus other options.
How do deferred annuities work—and why do they appeal to long-term savers?
A deferred annuity is an annuity that delays income payments until a future date. You invest during the accumulation phase, and then begin receiving income later—often in retirement.
One major benefit? Interest earnings accumulate tax-deferred, meaning you don’t pay taxes on growth until you withdraw funds. This can make a big difference for long-term savers—and it’s one reason many advisors recommend deferred annuities for tax-sensitive retirement planning. This guide on how to manage your wealth offers more long-view tips like this.
Non-qualified annuities explained: what they are and how they’re taxed
A non-qualified annuity is funded with after-tax dollars. It’s not part of a 401(k) or IRA. Because you already paid taxes on the money going in, only the earnings are taxable when withdrawn.
This is different from a qualified annuity, which is funded with pre-tax dollars inside a retirement account and is fully taxable upon withdrawal.
Taxes and annuities: what you really need to know before you buy
Let’s clear this up:
Are annuities given favorable tax treatment? Yes, earnings grow tax-deferred.
Is annuity income taxable? Yes, when you withdraw funds, earnings are taxed as ordinary income. In non-qualified annuities, only the earnings portion is taxed.
Understanding the tax treatment is key to choosing the right annuity type for your goals. The IRS offers guidance on tax rules for annuities. Truthifi's portfolio tools can help you see how those tax differences play out across your full investment picture.
Are annuities safe—and are they a smart investment strategy?
Annuities are generally safe because they’re backed by the financial strength of insurance companies. Morningstar research explores which types of annuities offer the best protection and value. Some offer principal protection, which can be appealing in volatile markets.
But whether they’re a good investment depends on your needs. They’re not designed to maximize returns. They’re meant to provide income stability, tax deferral, and peace of mind.
Pro tip: You can use Truthifi’s investment tracking and monitoring tools to compare annuities to other retirement strategies and evaluate total portfolio risk.
Final thoughts: are annuities the right piece in your retirement puzzle?
Annuities aren’t right for everyone. But they can be a smart part of a retirement plan—especially if you’re looking for predictable income and tax deferral.
Still have questions? This is where it helps to have the right tools and clarity. Truthifi’s wealth management guide offers deeper insights into how annuities, IRAs, and tax strategies all work together. Or dive into Truthifi’s features to compare advisor recommendations and see if your annuity strategy fits your broader financial goals.
Read next from the Truthifi Blog
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions.
Truthifi™ is the world’s first investment monitoring app. We're for investors who want clarity, advisors who want distinction, and an industry that needs trust.
Truthifi™ is the world’s first investment monitoring app. We're for investors who want clarity, advisors who want distinction, and an industry that needs trust.
Truthifi™ is the world’s first investment monitoring app. We're for investors who want clarity, advisors who want distinction, and an industry that needs trust.