Is An Annuity Worth It In 2026? Fixed Vs Variable Annuities For Business Owners Explained

As a self-employed business owner or solo founder, your retirement planning looks nothing like that of a W-2 employee. You don't have an employer-sponsored 401(k), a pension, or a Human Resources department managing your post-work income. You're responsible for everything: your current cash flow, your self-employment taxes, your business deductions, and your long-term retirement security. That's where annuities enter the conversation—and it's a more relevant conversation than many solo business owners realize.

Annuity sales hit a record $464.1 billion in 2025, up 7% from 2024, signaling that more Americans are taking retirement income seriously. For business owners facing irregular income, market volatility, and the pressure to self-fund retirement through a Solo 401(k) or SEP-IRA, an annuity can serve as a dedicated income foundation that works alongside your retirement savings plan. But not all annuities are created equal, and a variable annuity that underperforms the market is very different from a fixed annuity that locks in 6.30% or more for five years.

This guide breaks down whether an annuity makes sense for your business, which types actually deliver value, and how to avoid overpaying for features you'll never use.

What exactly is an annuity, and how do they work for business owners?

Short answer: An annuity is a contract between you and an insurance company where you give them a lump sum of money (or make periodic contributions), and they promise to pay you guaranteed income—either immediately or in retirement. For business owners, annuities function as an income insurance policy that protects against market crashes and outliving your savings.

The mechanics work like this: you invest a principal amount—anywhere from $10,000 to $500,000 or more—with an insurance company. That company then invests your money (in fixed bonds for a fixed annuity, or in market-linked investments for a variable annuity). In return, they promise you either a guaranteed income payment or income tied to market performance, depending on the type you choose. The income typically starts either immediately (if you buy an immediate annuity at retirement age) or at a future date you specify (if you buy a deferred annuity now and plan to tap it at 65 or 70).

For business owners, this matters because your income isn't stable. One year you gross $150,000 in net business income; the next year, a major client leaves and you're at $80,000. An annuity removes that guessing game for a portion of your retirement. You know exactly what payment you'll receive each month, beginning on a date you choose. That certainty pairs well with the uncertainty of self-employment income and the irregular cash flow that comes with owning a business.

Annuities also offer tax deferral, meaning the growth inside the contract compounds without annual tax drag. For a business owner in the 22% federal tax bracket, this deferral alone is worth roughly $6,000 to $9,000 in extra growth over a five-year term on a $200,000 investment, compared to holding the same amount in a certificate of deposit (CD).

Should you choose a fixed annuity or variable annuity for your retirement plan?

Short answer: Fixed annuities are generally better for business owners who want guaranteed income and certainty; variable annuities suit those willing to accept market risk in exchange for higher upside potential. Fixed-rate deferred annuities dominated 2025 sales at $165.3 billion, reflecting that most investors prioritize security over growth.

The choice between fixed and variable annuities hinges on a single question: do you want your retirement income guaranteed, or do you want to take market risk in hopes of higher returns?

A fixed annuity locks in an interest rate for a specific term (typically 3, 5, 7, or 10 years). As of May 2026, the best fixed annuity rates from A-rated insurance carriers range from 5.00% to 6.50% depending on term length, with five-year contracts paying up to 6.30% and seven-year contracts hitting 6.50%. That rate never changes. If you invest $200,000 at 6.30% for five years, you'll have approximately $268,800 at maturity—no market losses, no surprises. You receive either that lump sum at the end, or you can convert it to an income stream that pays you monthly checks for life.

A variable annuity, by contrast, ties your returns to the performance of underlying mutual fund-like subaccounts. You choose which market indices or equity funds your money tracks (S&P 500, bond index, international stocks, etc.), and your growth—or losses—follow those markets. Variable annuities sold $65.2 billion in 2025 and grew 7% year-over-year, appealing to investors who believe they can outpace inflation over a 20-year retirement horizon. But variable annuities come with higher fees (subaccount charges plus annuity fees often total 1.0% to 3.0% annually), and in a bear market, your principal can shrink.

For most self-employed business owners, the case for fixed annuities is stronger. Your business already exposes you to market risk and income volatility. Adding a variable annuity stacks another layer of market dependency on top of an already uncertain income picture. A fixed annuity, conversely, acts as an anchor—a guaranteed income floor that you can count on regardless of what the stock market does or how your business performs in a given year.

What are the current fixed annuity rates in 2026, and how do they compare to alternatives?

Short answer: Fixed annuity rates as of May 2026 range from 5.00% to 6.50% depending on carrier and term, significantly above CD rates (typically 4.0% to 4.75%) and competitive with the 10-year Treasury yield (4.2% to 4.5%). The Federal Reserve held the federal funds rate at 3.5%–3.75% in April 2026, keeping rates elevated for savers.

The rate environment for fixed annuities in 2026 remains attractive for business owners considering locking in guaranteed income. The best fixed annuity rates from A-rated carriers currently offer:

• 5-year multi-year guaranteed annuity (MYGA): up to 6.30%
• 7-year MYGA: up to 6.50%
• 3-year MYGA: approximately 5.00% to 5.20%

To put this in perspective, the 10-year Treasury yield settled in the 4.2% to 4.5% range as of May 2026, while high-yield savings accounts typically pay 4.0% to 4.75%. A fixed annuity at 6.30% or 6.50% outpaces both, and critically, the interest compounds tax-deferred inside the contract. For a self-employed business owner in a 22% federal tax bracket, that tax deferral creates meaningful compounding advantage over the annuity term.

Why are fixed annuity rates so competitive right now? The Federal Reserve held the federal funds rate steady at 3.5%–3.75% in April 2026, maintaining the higher rate environment that began in 2022. Insurance companies price fixed annuities based on long-term bond yields and reserve requirements, so as long as the Fed keeps rates elevated, annuity carriers can afford to offer 6%+ rates to new customers. However, rates are not guaranteed to stay this high. If the Fed cuts rates in late 2026 or 2027, new annuity rates will likely decline—making the current 6.30% to 6.50% rates a time-sensitive opportunity for business owners who want to lock in security.

The table above shows the rate advantage clearly. A five-year fixed annuity at 6.30% beats a Treasury bond at 4.35% by 195 basis points, and beats a high-yield savings account at 4.75% by 155 basis points. That spread compounds significantly over five years. On a $200,000 investment, the difference between 6.30% and 4.75% is roughly $31,000 more in total growth at maturity—and that's before accounting for the tax-deferral benefit inside the annuity.

How do indexed annuities fit into the picture for self-employed business owners?

Short answer: Indexed annuities (FIAs and RILAs) offer a middle ground between fixed and variable: returns are tied to market indices like the S&P 500, but your principal is protected from losses. Indexed product sales hit a record 45% of total annuity market share in 2025 (up from 24% a decade ago), and RILA sales grew 20% year-over-year to $79.5 billion, signaling strong demand.

Indexed annuities represent a hybrid approach that appeals to risk-averse investors who still want exposure to stock market upside. With an indexed annuity, your money doesn't invest directly in the stock market. Instead, the insurance company credits returns to your account based on how an index (like the S&P 500) performs, subject to caps, spreads, and participation rates set by the carrier.

Here's how it works in practice: you might buy a fixed indexed annuity (FIA) with a 70% participation rate on the S&P 500. If the S&P 500 gains 10% in a year, your annuity credits 7% to your account (10% × 0.70). But if the S&P 500 loses 20%, your account doesn't lose anything—the principal remains intact. This downside protection appeals to business owners who've lived through market crashes and know how terrifying portfolio losses feel when you're self-employed and can't fall back on a W-2 paycheck.

Registered index-linked annuities (RILAs), a newer product category launched in 2020, are gaining steam. RILA sales jumped 20% year-over-year in 2025 to $79.5 billion, marking the 11th consecutive year of growth for this product class. RILAs are structured similarly to FIAs but are registered as securities (like mutual funds), offering more transparency and potentially lower fees than traditional indexed annuities. For self-employed investors comfortable with slightly more market exposure, RILAs can offer better value than traditional indexed annuities.

The trade-off with indexed annuities is lower upside than a pure variable annuity invested in equities. If you could have invested $200,000 directly in the S&P 500 and earned a full 10%, you'd gain $20,000. But with a 70% participation rate on an indexed annuity, you only capture $14,000 of that gain. Over a 20-year retirement, that 30% participation haircut compounds into a meaningful difference. Indexed annuities make most sense for business owners in their late 50s or early 60s who can't afford a major market downturn, rather than for younger self-employed individuals with 25+ years until retirement.

What are the real costs and fees hidden inside annuities?

Short answer: Fixed annuities have minimal fees (usually just insurance company margins built into the rate), but variable and indexed annuities often charge 1.0% to 3.0% annually, plus surrender charges if you withdraw before a specified period (typically 7–10 years). For a business owner, those cumulative fees can cost $20,000 to $60,000 on a $200,000 investment over a decade.

This is where annuity marketing gets deceptive. Brokers tout attractive rates or participation rates without clearly disclosing the fee structure. For fixed annuities, fees are relatively simple: the carrier quotes you a rate (say, 6.30%), and that rate already factors in the insurance company's profit margin and administrative costs. You pay nothing extra; the rate is all-inclusive.

But for variable and indexed annuities, the fee landscape is far more complex. You'll encounter:

• Subaccount fees (variable annuities only): the underlying mutual funds charge 0.30% to 1.50% annually
• Annuity mortality and expense (M&E) charge: typically 0.70% to 1.50% annually to cover insurance company costs and profit
• Administrative and rider fees: $0 to $300 annually, depending on optional guarantees you add
• Surrender charges: 3% to 10% if you withdraw more than a small amount (typically 10% of the account) in years 1–7, declining thereafter
• Distribution charges: if you annuitize into an income stream, additional 0.50% to 1.0% fees

Example: you invest $200,000 in a variable annuity with a 1.0% M&E charge, 0.60% average subaccount fee, and a $50 annual administration fee. Your total annual cost is roughly $2,290 (1.6% + $50). Over 10 years, at 7% average market returns, you'll pay approximately $28,500 in cumulative fees—nearly 15% of your original investment. Meanwhile, if you had invested that same $200,000 in a low-cost index fund at 0.05% annually, you'd pay only $1,000 over the same period, netting you roughly $27,500 more in your pocket.

For self-employed business owners, this fee drag matters. Your income is irregular, and every dollar counts in retirement. Before buying any annuity, demand a detailed fee illustration showing exactly what you'll pay, year by year, including surrender charges. If a broker can't produce this clearly, walk away.

How do annuities fit into a self-employed retirement plan alongside Solo 401(k) and SEP-IRA contributions?

Short answer: Annuities are not retirement plans themselves—they're post-tax investments you fund after maxing out tax-deferred accounts like a Solo 401(k) or SEP-IRA. For self-employed business owners, the priority order is: maximize your Solo 401(k) or SEP-IRA first (tax-deductible contributions), then use excess business income to fund an annuity for guaranteed income in later retirement.

The tax treatment differs significantly between these vehicles. Contributions to a Solo 401(k) or SEP-IRA are tax-deductible in the year you make them, reducing your self-employment income and lowering your tax bill immediately. An annuity, by contrast, is funded with after-tax dollars—money you've already paid income tax and self-employment tax on. Inside the annuity, growth is tax-deferred, meaning you don't pay annual tax on interest or gains. But when you withdraw or annuitize the contract, you'll pay ordinary income tax on all the growth (not capital gains rates).

Here's a practical scenario for a self-employed consultant with $150,000 in net self-employment income:

1. Max out a Solo 401(k) contribution of $69,000 (employee deferral + employer contribution, 2026 limits). This reduces taxable income to $81,000 and saves roughly $26,000 in federal and self-employment taxes.
2. Fund a backdoor Roth conversion if applicable, to diversify tax treatment of retirement assets.
3. With remaining business profit, invest $30,000 to $50,000 in a five-year fixed annuity at 6.30%. This compounds tax-deferred and provides a guaranteed income stream when you turn 60 or 65.
4. Keep $5,000 to $10,000 in a business emergency fund (high-yield savings account) to handle seasonal cash flow gaps.

This strategy balances three goals: maximizing tax-deductible retirement savings (Solo 401(k)), securing a guaranteed income floor (annuity), and maintaining liquidity for business operations. An annuity alone is not enough to fund a comfortable retirement, but paired with a Solo 401(k) and personal investments, it provides valuable income certainty.

What happens to your annuity if you need the money early (liquidity and surrender charges)?

Short answer: Most annuities impose surrender charges of 3% to 10% if you withdraw more than 10% annually before the contract term ends (typically 7–10 years). For a self-employed business owner facing sudden cash flow crisis, that penalty can be devastating—turning a $200,000 emergency into a $20,000 to $28,000 loss.

This is the annuity trap that catches unprepared business owners. You fund a five-year fixed annuity thinking you won't need the money. Two years later, your biggest client leaves. Your business income drops 40%. You need to access that annuity to cover payroll or make loan payments. But the contract has a seven-year surrender period, and withdrawing $50,000 early triggers a 7% surrender charge—$3,500 penalty, plus income taxes on the gains portion.

To avoid this, only fund an annuity with money you genuinely won't need for the stated term. For self-employed business owners with variable income, this is harder than for W-2 employees with stable paychecks. Before buying an annuity, ensure you have:

• A dedicated business emergency fund with 6–12 months of operating expenses (not in the annuity)
• A business line of credit or securities-backed line of credit available if cash flow tightens
• Confidence that the annuity money truly belongs in retirement savings, not business operations

Some annuities offer "free withdrawal" provisions allowing 10% annual access without penalty—but these are rarer and often come with lower credited rates in exchange for the flexibility. If you're uncertain about your ability to commit capital for five to ten years, a high-yield savings account or short-term CD ladder is safer than an annuity.

Do annuity sales commissions bias advisors toward recommending annuities you don't need?

Short answer: Yes. Annuity advisors typically earn 4% to 8% upfront commissions, creating a strong incentive to sell annuities even to clients who don't need them. Approximately 68% of financial advisors are projected to recommend annuities to clients in 2025, but not all those recommendations serve the client's best interests. Always demand a fee-only advisor analysis before committing capital.

This is the uncomfortable truth about annuities: they are among the most lucrative products a financial advisor can sell. A broker recommending a $200,000 fixed annuity earns a 5% commission ($10,000) paid by the insurance carrier. That same broker recommending a $200,000 low-cost index fund earns nothing, or a fraction of a percent if operating on a fee-based model. This creates a perverse incentive: brokers are financially motivated to steer clients toward annuities regardless of whether they're actually appropriate.

Annuity sales hit record $464.1 billion in 2025, up 7% year-over-year, and approximately 68% of financial advisors are projected to recommend annuities in 2025. But volume alone doesn't validate suitability. Many of those recommendations are made to retirees who have plenty of other income sources and don't need guaranteed income. For business owners, this risk is compounded: you likely lack a financial advisor entirely (most solo founders manage their own finances or work with a CPA on taxes). When you do seek advice, you may encounter commission-hungry brokers selling products that generate fees rather than solutions aligned with your actual retirement needs.

To protect yourself: if an advisor recommends an annuity, ask them explicitly, "How much commission do you earn if I buy this product?" If they hesitate to answer clearly, that's a red flag. Better yet, seek a fee-only fiduciary advisor who is legally obligated to act in your best interest, not their commission interest. Fee-only advisors charge an hourly rate, a fixed annual fee, or an assets-under-management percentage—never product-based commissions. This alignment matters, especially for business owners managing complex income patterns and business-related tax situations.

What is the tax treatment of annuity withdrawals and annuitization for self-employed individuals?

Short answer: Annuity withdrawals are taxed as ordinary income (not capital gains). If you withdraw before age 59½, you typically face a 10% IRS early withdrawal penalty plus income tax on gains. When you annuitize into an income stream, a portion of each payment is treated as a tax-free return of principal, with the remainder taxed as ordinary income—reducing your annual tax bill compared to total withdrawal.

The IRS treats annuities with specific tax rules outlined in IRS Publication 575. When you invested your after-tax dollars into the annuity, those dollars already had income tax paid on them—they're your "cost basis" or "exclusion ratio." When you annuitize or withdraw, the IRS wants to avoid double-taxing that basis.

Here's how it works:

• Lump-sum withdrawal: You withdraw the entire account balance at once. The portion equal to your original investment (cost basis) comes out tax-free. All gains since purchase are taxed as ordinary income at your marginal rate (likely 22%–35% for self-employed individuals with decent income).
• Partial withdrawal: You withdraw less than the full balance. The IRS assumes you're withdrawing gains first (unfavorable to you), so the entire withdrawal is taxed as ordinary income until all gains are withdrawn. Cost basis comes out last, tax-free.
• Annuitization (lifetime income stream): You convert the balance into monthly payments for life. Each month's payment is split into a tax-free return of basis and taxable gains. The IRS publishes life-expectancy tables that calculate your "exclusion ratio"—the percentage of each payment that's tax-free. For a 65-year-old female, roughly 40% of each payment might be tax-free; 60% would be taxable.

For self-employed business owners with irregular income, annuitization is often more tax-efficient than lump-sum withdrawal. A $200,000 annuity annuitized into $1,200 monthly payments ($14,400 annually) might result in only $8,640 taxable income per year, with $5,760 tax-free. This beats taking a $200,000 lump sum and paying 22% federal tax ($44,000) plus state income tax, and it creates a predictable, manageable income stream in retirement.

Important caveat: if you withdraw before age 59½, you face a 10% IRS early withdrawal penalty on gains (not basis), on top of ordinary income tax. This makes early withdrawal extremely costly and should be avoided except in genuine hardship situations. This is another reason to only fund an annuity with money you won't need access to before early retirement.

Which carriers and types of fixed annuities offer the best rates right now for business owners?

Short answer: The best fixed annuity rates as of May 2026 come from A-rated carriers and range from 6.30% to 6.50% for multi-year guaranteed annuity contracts (MYGAs). Rates vary by carrier, so shopping multiple quotes is essential. However, never prioritize rate alone—carrier safety rating (A or A+ from AM Best) is more important, because if the insurer fails, you lose everything.

As a business owner, you're accustomed to comparing vendors: you shop for business insurance, accounting software, and client proposals based on both price and reliability. Annuity shopping requires the same discipline. A 6.50% rate from a carrier with weak financial ratings is worthless if that company becomes insolvent during your contract term.

To find current rates, consult independent annuity rate shopping sites that pull quotes from multiple carriers, such as myannuitystore.com or annuity.org. These platforms don't sell annuities themselves; they aggregate quotes from carriers and let you compare rates side-by-side. When comparing, look for:

• Carrier rating: A or A+ from AM Best (Safety First is a reputable rating agency)
• Liquidity terms: annual withdrawal allowance (typically 10% without penalty) and surrender period (5, 7, or 10 years)
• Inflation rider (optional): some carriers offer an additional cost to bump the rate up by a small percentage each year, hedging inflation—useful if you plan to defer withdrawals for 10+ years
• Income rider (optional): additional cost for a guaranteed lifetime income floor above a certain age—valuable if you're annuitizing for income but want to offset longevity risk

As of May 2026, five-year MYGAs from A-rated carriers hit 6.30%, while seven-year contracts reached 6.50%. These rates reflect the Fed's stable 3.5%–3.75% federal funds rate. If the Fed cuts rates in the second half of 2026 (possible given economic uncertainty), new rates will decline. If you're genuinely ready to lock in a fixed income foundation, current conditions favor action before rates fall—but only if you're confident you won't need the capital before the term ends.

How many Americans are actually buying annuities, and what does that say about their retirement readiness?

Short answer: Annuity sales reached a record $464.1 billion in 2025, up 7% from 2024, but just 1 in 5 pre-retirees own an annuity. Worse, nearly half of pre-retirees say they won't have enough guaranteed income to cover basic living expenses in retirement—a crisis that annuities could help address, but don't.