Deferred Annuity: What It Is and How It Works

What is a deferred annuity?

A deferred annuity is an insurance contract that grows your money tax-deferred now and pays it back later, as a lump sum or as guaranteed income. You fund it today, let it build for as long as you choose, then start withdrawals or lifetime payments at a future date.

That delay is what separates it from an immediate annuity, which starts paying within a year. Most fixed, fixed index and variable annuities sold today are deferred annuities.

How does a deferred annuity work?

Every deferred annuity has two phases. The choices you make in each one decide how much you end up with and how you get paid.

• Accumulation phase. You pay a premium and the balance grows tax-deferred. You owe no tax on the growth until you take money out.
• Payout phase. You take the money as a lump sum, as withdrawals, or by turning the balance into guaranteed income (annuitization).

How long is the accumulation period?

There is no set length. It runs from the day you buy until you start income, which can be 2 years or 30. Most fixed annuities carry a surrender period of 3 to 10 years, and many owners let the contract keep growing after it ends.

How do interest earnings accumulate in a deferred annuity?

Interest builds up inside the contract and compounds tax-deferred until you withdraw it. How that interest is credited depends on the type of deferred annuity you buy.

• Fixed (MYGA). The insurer guarantees one rate for the whole term. At today's top 10-year rate of 6.30% (compound), $100,000 grows to about $184,218 over 10 years, a gain of $84,218.
• Fixed index (FIA). Interest follows a market index such as the S&P 500, up to a cap or participation rate, with a 0% floor. The highest no-fee S&P 500 annual cap we track today is 17.00%.
• Variable. Your money goes into subaccounts that rise and fall with the market. There is no floor on losses unless you pay for a rider.

Because no tax comes out each year, more of your money keeps earning. That is the main edge over a taxable CD or savings account paying the same rate.

Compare today’s MYGA rates See fixed index annuity caps

Real example: income now vs. income later

Here is what waiting does, using real quotes for a 65-year-old man with $100,000. The figures are the top monthly payouts from carriers rated A- or better as of October 2026.

• Waiting pays more. The deferred income annuity pays 155% more per month than starting income at 65.
• Locking in early pays more too. It also pays 100% more than holding the same $100,000 and buying an immediate annuity at 75.
• The trade-off. These quotes are life only with no refund, so nothing is paid if he dies before 75. Adding a return-of-premium death benefit protects heirs but lowers the payout.

Types of deferred annuities

Deferred annuities are sorted two ways: how the money grows and how you pay in.

• Single premium. One lump-sum deposit, such as a CD rollover or 401(k) money. Most MYGAs and DIAs work this way.
• Flexible premium. You can add money over time. Some fixed index and variable annuities allow this.

For a side-by-side look at every option, see our guide to the types of annuities.

What is a deferred income annuity?

A deferred income annuity (DIA) is a deferred annuity built only for future income. You pay a lump sum now, pick a start date, and the insurer locks in your monthly payment today.

It has no account value to withdraw, so it trades flexibility for a larger guaranteed paycheck. A qualified longevity annuity contract (QLAC) is a DIA bought with IRA money that can delay required minimum distributions.

See what today’s carriers pay in our income annuity rates table.

Deferred annuity vs. immediate annuity vs. annuity due

• Deferred annuity. Income starts at a future date you choose. The money grows tax-deferred until then.
• Immediate annuity. Income starts within 12 months of buying. See how much a $100,000 annuity pays per month.
• Annuity due. This describes payment timing, not a type of contract. An annuity due pays at the start of each period instead of the end.

Deferred annuity payout options

• Lump sum. Take the full balance once the surrender period ends. The gain is taxed as ordinary income that year.
• Systematic withdrawals. Take money out as you need it. Many contracts allow up to 10% a year free of surrender charges.
• Annuitization. Turn the balance into guaranteed payments for life or a set period. Once you annuitize, the choice is usually permanent.
• Income rider. Some fixed index annuities offer an income rider that guarantees lifetime withdrawals while you keep access to the account value.

How is a deferred annuity taxed?

• Growth is tax-deferred. You owe nothing on interest until you withdraw it.
• Gains come out first. On a non-qualified annuity, withdrawals count as earnings first and are taxed at ordinary income rates.
• 10% penalty before 59½. The IRS adds a 10% tax on the taxable part of withdrawals taken before age 59½, with some exceptions.
• Qualified vs. non-qualified. In a qualified annuity funded with IRA or 401(k) money, every dollar withdrawn is taxable and RMDs apply. In a non-qualified annuity bought with after-tax savings, only the earnings are taxed.
• Tax-free moves. You can move one annuity into another without tax through a 1035 exchange.

The IRS covers these rules in Publication 575. Our guide to how annuities are taxed walks through examples.

What happens to a deferred annuity when you die?

During the accumulation phase, most deferred annuities pay the account value to your beneficiaries. A surviving spouse can usually keep the contract as the new owner and keep the tax deferral.

Other beneficiaries owe income tax on the gains and must take the money within set time limits. Our guide to annuity beneficiary rules explains each option.

What are the downsides of a deferred annuity?

• Surrender charges. Withdrawing more than the free amount in the early years triggers a charge that usually starts near 7% to 10% and falls each year. See how surrender charges work.
• Gains are taxed as income. Withdrawals are taxed at ordinary income rates, not the lower capital gains rates.
• Penalty before 59½. Early withdrawals can add a 10% IRS penalty on top of income tax.
• Fees on some types. Variable annuities can cost 2% or more a year once fund and rider fees are added. Most MYGAs have no annual fee.
• Insurer risk. Guarantees depend on the insurance company’s claims-paying ability, so check its financial strength rating before you buy.

Is a deferred annuity right for you?

• Good fit. You have savings you will not need for at least 3 to 10 years, and you want guaranteed growth or a larger paycheck later.
• Poor fit. You may need the money soon, you plan to withdraw before 59½, or this would be your emergency fund.

If a deferred annuity fits your plan, compare guaranteed rates from 90+ top annuity companies before you pick a term or a start date for income.

Compare today’s annuity rates Use the fixed annuity calculator

Frequently Asked Questions