What Are Indexed Annuities?

An index annuity is a type of annuity that uses a stock market index, like the S&P 500, to calculate its rate of return. Unlike most variable annuities, index annuities have limits on potential gains and losses, making them less risky than investing directly in the market. 

Here are some other characteristics of index annuities:

• Capped gainsAn investor's potential returns are limited by the interest rate cap. This can result in lower returns during periods of strong market performance.
• Guaranteed minimum returnThe guaranteed minimum return ensures that an indexed annuity's value won't fall below the amount specified in the contract.
• FeesIndex annuities and variable annuities are subject to an investment expense ratio, a fee for managing the annuity's investments. It can range from 0.6% to over 3% each year.
• TaxationWithdrawals from a fixed indexed annuity will reduce the value of your annuity and can be subject to ordinary income tax. Withdrawals prior to age 59½ may also be subject to a 10% federal tax penalty.
• ReturnThe return on an index annuity may be higher or lower than the guaranteed rate of return on conventional fixed annuities.