Glossary
Deferred annuity
An annuity that grows tax-deferred for years before income begins, used to build retirement savings or lock in future lifetime payments.
A deferred annuity is an annuity contract in which income begins at a later date, often years after purchase, rather than within the first year. During the accumulation phase, the money grows tax-deferred at a declared fixed rate, through an index-linked formula or in investment subaccounts, depending on the type.
There are two broad uses. Savings-oriented deferred annuities (fixed, multi-year guaranteed, indexed and variable) let the owner build value and later withdraw it, annuitize it or turn on an income rider. Deferred income annuities instead lock in a specific future lifetime income from the start. Hypothetical example: a 60-year-old puts $100,000 into a five-year multi-year guaranteed annuity at a fixed rate, then at 65 either renews, moves the money through a 1035 exchange or begins withdrawals.
Most deferred annuities have surrender charges for the first several years, and withdrawals of earnings before age 59½ usually trigger a 10% federal tax penalty on top of income tax. Gains are taxed as ordinary income rather than capital gains, and heirs do not get a step-up in basis. A deferred annuity inside an IRA adds no extra tax deferral, so the case rests on its guarantees. See what is an annuity and how does it work? and Deferred income annuities (DIAs): longevity insurance explained.
Last reviewed October 4, 2026