Annuities in Retirement: The Honest Pros, Cons, and Ohio Rules

Annuities generate more strong opinions than almost anything else in retirement planning. One neighbor swears the annuity is the only reason she sleeps at night. Another will tell you he got talked into one at a steak dinner and spent four years trying to get out of it.

Both of them are telling the truth. Annuities are a tool, and like any tool they’re excellent for a narrow set of jobs and genuinely bad for everything else. Here’s a straight look at both sides, plus the Ohio rules that exist specifically to protect you during the sale.

What an Annuity Actually Is

Strip away the brochures and an annuity is a contract with an insurance company. You hand over money, either all at once or over time. In exchange, the company promises to pay you back later — as a lump sum, over a set number of years, or for the rest of your life no matter how long that is.

That last version is the one that matters most. An insurance company is one of the few entities that will take on the risk of you living to 100. Your 401(k) will not do that. This is the core thing an annuity does that nothing else in your portfolio does, and it’s the honest starting point for deciding whether you need one.

The Main Types You’ll Be Shown

A single immediate annuity is the simplest: you pay a lump sum and income starts right away, usually within a year. There’s not much to go wrong, and not much flexibility either.

A fixed deferred annuity grows at a rate the insurer sets, and you turn on income later. A multi-year guaranteed annuity is the plainest version, with a set rate for a set term — the closest thing in this family to a bank CD, though it is not a CD and is not FDIC insured.

A fixed indexed annuity credits interest based on the movement of a market index, with a floor that limits losses and a cap or participation rate that limits gains. You are not invested in the index. The formulas can be complicated, and complexity is where costs hide.

A variable annuity puts your money in subaccounts that rise and fall with the markets. These are securities, and they come with a prospectus you should actually read. Layered fees are common here.

The Case For: What Annuities Do Well

The strongest argument is behavioral as much as financial. A lifetime income stream converts an abstract pile of money into a predictable monthly deposit, and people who have that tend to spend more comfortably and worry less. Retirees who spend their eighties afraid to buy a new furnace are a real and common outcome of an all-portfolio retirement.

Second, an annuity covers longevity risk. If you have a family history of long life and only modest guaranteed income, a lifetime annuity turns “what if I live to 97” from a threat into somebody else’s problem.

Third, guaranteed income lets the rest of your portfolio do its job. When your fixed costs are covered by Social Security plus an annuity, a bad market year doesn’t force you to sell investments at the worst possible time.

Fourth, tax deferral. Growth inside a non-qualified annuity isn’t taxed until you take it out, which can be useful for someone already maxing out other tax-advantaged accounts.

The Case Against: Where They Go Wrong

Surrender charges are the biggest practical problem. Most deferred annuities lock your money up for a term, often somewhere between five and ten years, with a declining penalty for early withdrawal. If you need that money for a roof, a car, or a move to assisted living, the penalty is real. Annuity money should be money you know you won’t need.

Fees can be steep and hard to see, particularly in variable and indexed products, where mortality and expense charges, rider fees, and fund expenses stack on top of one another. Ask for every charge as an annual percentage, in writing.

Complexity is a cost of its own. If you cannot explain in one sentence how your annuity credits interest, you shouldn’t buy it — not because it’s necessarily bad, but because you won’t be able to tell later whether it’s working.

And there’s an opportunity cost. Money in a conservative annuity is money not growing elsewhere. For a retiree who already has substantial guaranteed income, adding more can mean solving a problem they didn’t have.

How Annuity Income Is Taxed

This is where the worked example helps.

The taxable portion of an annuity distribution is ordinary income — not capital gains. That surprises people who assume investment growth gets favorable treatment.

If you bought the annuity with after-tax money, each payment is part return of your own principal and part earnings, and only the earnings portion is taxed. The IRS calls the split the exclusion ratio: your investment in the contract divided by your expected return.

Say you put in $100,000 of after-tax savings and your expected return over the payout period is $180,000. Divide $100,000 by $180,000 and you get roughly 55.6%. So on a $1,000 monthly payment, about $556 comes back tax-free as your own money and about $444 is taxable ordinary income. Once you’ve recovered your full cost, later payments are fully taxable.

One more trap: distributions before age 59½ can trigger an additional 10% tax on the portion included in your income, unless an exception applies. That mostly affects people who buy an annuity in their fifties and change their minds.

Qualified vs. Non-Qualified, and What It Means for RMDs

An annuity bought inside an IRA or a 401(k) is a qualified annuity, and the money going in was pre-tax. When you withdraw, the whole payment is generally taxable, and required minimum distribution rules still apply. The RMD age is currently 73 for those born between 1951 and 1958, and it rises to 75 in 2033 under SECURE 2.0.

Buying an annuity inside an IRA also means you are paying for tax deferral you already had. That’s not automatically wrong — you might want the lifetime income guarantee — but if tax deferral is the pitch, the pitch doesn’t apply.

There’s one genuinely useful wrinkle here. A qualifying longevity annuity contract, or QLAC, lets you move a limited amount of IRA money into a deferred annuity that starts paying later in life, and that amount is excluded from your RMD calculation in the meantime. The premium cap was $200,000 for 2025 and is indexed for inflation, so confirm the current year’s figure with the IRS before you plan around it.

Ohio Rules That Protect You

Ohio has taken the sale of annuities to older adults seriously, and it’s worth knowing what you’re owed.

Under Ohio Administrative Code 3901-6-13, an agent must act in your best interest when recommending an annuity, and the insurer has to supervise those recommendations. The recommendation has to account for your actual profile — your age, income, financial situation, and objectives — along with the product’s costs, rates, benefits, and features. Agents must complete a one-time four-credit Annuity Best Interest course before they can sell annuities at all.

Be clear-eyed about the limits, though: the rule states plainly that it creates a regulatory obligation, not a fiduciary one. It’s a meaningful protection, not the same thing as a legal duty of loyalty.

You’re also entitled to disclosure. Under Ohio Administrative Code 3901-6-14, if the buyer’s guide and the disclosure document were not given to you at or before the time of application, you must get a free look period of at least fifteen days to return the contract without penalty. If someone hands you a stack of paperwork to sign at a dinner seminar and the buyer’s guide isn’t in it, that’s not a small oversight.

If something feels wrong, the Ohio Department of Insurance Consumer Services line is 800-686-1526. That number exists for exactly this.

Questions to Ask Before You Sign

Ask what the surrender period is and what the penalty looks like in each year of it. Ask for total annual costs as a percentage, including every rider. Ask what happens to the money if you die before or during the payout, and what your spouse receives. Ask how the interest is actually credited, and make them explain it without the brochure.

Then ask two questions about the person, not the product: how you’re being compensated, and what else you considered before recommending this. Both are fair questions, and how someone reacts to them tells you a great deal.

Last, ask for the buyer’s guide and the disclosure document before you apply, not after. You’re entitled to them, and having them in hand at the right moment is what preserves your protections.

How This Fits a Miami Valley Retirement Plan

Around Dayton, a lot of retirees are already partly annuitized and don’t think of it that way. If you retired from OPERS, STRS Ohio, or civil service at Wright-Patterson, you have a pension — a lifetime income stream with survivor options. Add Social Security and your fixed costs may already be well covered. In that case, another annuity may be solving a problem you’ve already solved.

The picture looks different for someone who spent a career in the private sector with a 401(k) and no pension, where Social Security is the only guaranteed check arriving. There, filling part of the gap with lifetime income can make the difference between a retirement you enjoy and one you ration.

The honest answer is that annuities are neither the miracle nor the scam. The right question isn’t “are annuities good,” it’s “do I have an income gap, and is this the cheapest, simplest way to close it.”

If you’d like help figuring out where you land, that’s the conversation we have every week. Medicare and Retirement Solutions Group is in Beavercreek, serving retirees across Greene and Montgomery counties and the wider Miami Valley. A consultation is free, and we’re just as willing to tell you that you don’t need an annuity. Call us, or reach out through medretiregroup.com.

This article is general educational information, not individualized tax, insurance, or investment advice. Rules and figures change and individual circumstances vary — please confirm details with your plan, or speak with a qualified professional, before acting.