The fixed annuity

A fixed annuity is an interest-based vehicle similar to a bank-issued CD but geared toward retirement savings. Typically, a lump-sum of cash locks in a 3-10% interest rate for 3-15 years. Their main disadvantage--penalty fees from the IRS and the insurance company--is a significant factor only with premature withdrawal.

Fixed Annuity Advantages

• Low risk
• More liquidity than CDs
• Tax-deferred
• Typically higher yields than bonds, CDs, treasuries, or money market accounts

Fixed Annuity Disadvantages

• Income withdrawals before the age of 59.5 are charged a 10% tax penalty by the IRS.
• Growth is tax-deferred, but eventually income is taxed at ordinary income tax rates.
• The insurance company usually imposes a penalty if withdrawing over the yearly allotment.
• Further monies cannot be added to the same annuity contract (although additional contracts can be purchased).