Quick Answer
A fixed indexed annuity credits interest based on an index during the accumulation period. When you want retirement income, you can turn the value into income payments or, if the contract has one, use an income rider.
Step 1: Accumulation
You pay a premium. The insurer credits interest linked to changes in a market index, subject to the contract’s cap, participation rate or spread. If the index goes down, the index-linked interest for that period is usually zero. The contract also sets a minimum guaranteed value.
Step 2: Choosing how income is paid
There are two common ways to take retirement income:
- Annuitize: convert the value into income payments: life only, life with period certain, joint and survivor, or a fixed period.
- Guaranteed lifetime withdrawal benefit (GLWB) rider: some contracts offer an optional rider, often for an extra fee, that lets you take withdrawals for life while keeping access to the remaining account value.
Step 3: Know the costs and limits
Withdrawals above the free withdrawal amount during the surrender period may carry surrender charges and, in some contracts, a market value adjustment (MVA). Interest is generally taxed as ordinary income when withdrawn, and withdrawals before age 59½ may carry a 10% federal tax penalty.
Questions to ask
- How is index-linked interest calculated, and can the company change the cap or participation rate?
- How long is the surrender period, and what are the charges each year?
- What does any income rider cost, and how is the withdrawal amount figured?
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This is general education, not a recommendation. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Read your contract and its disclosure for exact terms.