A 70-year-old moves $300,000 from a traditional IRA to an insurance company and receives $2,050 a month for life. Market drops do not change that payment. Every dollar of that payment is taxable, and that tax bill arrives as surely as the payment.

Annuity contracts are taxed differently depending on how they are funded. When an annuity is bought with money that’s already been taxed (a “non-qualified” annuity), only the earnings are taxed, not the principal. Part of each check is simply the buyer’s own money returning tax-free.

Inside a traditional IRA, that tax-free portion doesn’t exist, because none of the money in the account was ever taxed. As a result, all payments are fully taxable as ordinary income. That works out to $24,600 a year added to the retiree’s tax return. In the 12% bracket, that’s $246 of every monthly check going to federal tax.

An annuity addresses a specific risk. Longevity risk means the risk of outlasting savings, and a portfolio can’t fully protect against it. Consumer finance host Clark Howard put it this way: “Statistically, people end up living longer than they might expect.” For a retiree with no pension who is concerned about the market, a payment that never stops is a legitimate answer.

That guarantee is a binding promise from the insurance company. If the insurance company fails, state guaranty associations step in, typically covering up to $250,000 in the present value of annuity benefits. Connecticut offers up to $500,000, while California protects 80% of the value, up to $250,000. A contract this size can exceed the backstop in many states. The insurer’s financial strength rating matters: it’s an independent grade of the company’s ability to keep paying claims for decades.

Once bought, the lump sum is gone and can’t cover emergencies or pass to heirs. A life-only payout pays the most and stops at death. Period-certain options keep payments going to heirs for a set number of years; joint-survivor options cover a spouse. Each protection lowers the monthly amount. Inflation protection works the same way: the higher the cost-of-living increase chosen, the lower the initial payment. A fixed check loses buying power every year, while Social Security’s 2027 adjustment is tracking toward 3.6%.

Required minimum distributions (RMDs) begin at age 73. Payments from an annuitized contract can count toward the RMD. Buying at 70 means fully taxable income starts before the law requires any withdrawals.

A qualified longevity annuity contract (QLAC) offers a real tax advantage. Up to $210,000 in 2026 can go into one, and that amount is excluded from the RMD calculation. Payments can begin as late as age 85, keeping that income off the tax return during the years in between.

Delaying Social Security is often cheaper for lifetime income. Benefits rise 8.0% for each year you delay past full retirement age, up to age 70. The government backs that income and adjusts it for inflation. The 10-year Treasury yields 5.3%, and the principal stays available, though a bond doesn’t protect against a long life the way an annuity does.

Guaranteed income means guaranteed taxable income with no way to shrink it in a given year. Social Security benefits become taxable once combined income tops $25,000 for individual filers or $32,000 for joint filers, and the annuity’s income counts toward that line every year (one of nine IRS rules that slowly drain retirement accounts, all charted in our free tax trap map).

Medicare’s standard Part B premium is $202.90, with surcharges beginning above $109,000 of modified adjusted gross income for single filers. Those surcharges are based on income from two years prior.

This setup fits a retiree with no pension, maxed-out Social Security, plenty of liquid savings outside the annuity, and a low tax bracket. It fits poorly for someone who needs flexibility, wants to leave money to heirs, or has income close to Social Security or Medicare thresholds. Key figures to compare before signing include the after-tax monthly amount, the insurer’s rating and state guaranty limit, and whether a QLAC or delaying Social Security would have bought the same security for less.

Contact [email protected] for any questions or corrections.