An immediate annuity is better if you need income to start within the next year and want it to last as long as you do; a deferred annuity is better if you can leave the money alone for several years and want to keep control of it until then. The difference between the two is simply when the payments begin: an immediate annuity typically starts paying within one year of purchase, while a deferred annuity grows through an accumulation phase first and pays out later (SEC Investor.gov).
That one difference changes almost everything else about the contract: how it is taxed, what happens if you need the money early, what happens when you die, what Florida law does to protect you, and even what it does to your Medicare premium two years later. This article walks through each of those, puts the two side by side, and ends with the questions to ask before signing either one.
What is the difference between an immediate annuity and a deferred annuity?
Every annuity is a contract with an insurance company: you pay a premium, and the insurer agrees to make periodic income payments to you “beginning immediately or at some future date” (Investor.gov). The two families are named for which of those it is.
An immediate annuity is bought with a single payment, and you “typically start receiving income payments within one year of purchase” (Investor.gov). The federal tax code is more precise: an immediate annuity is one purchased with a single premium, with an annuity starting date no later than one year from purchase, that provides a series of substantially equal periodic payments (26 U.S.C. §72(u)(4)). You will see it sold as a SPIA, a single premium immediate annuity. There is no accumulation phase. You hand over the lump sum, the insurer calculates a payment from your age, the payout option you choose and current rates, and the cheques start.
A deferred annuity is bought with “a single payment or flexible payments over time that allow you to accumulate money for future income,” and “the money you pay is allowed to grow tax-deferred before you start receiving income payments” (Investor.gov). That growth period is the accumulation phase. The period when income payments begin is the payout phase, and for a deferred annuity the payout phase may start in five years, in twenty, or never, because most owners take withdrawals or leave the value to a beneficiary rather than ever annuitizing.
The IRS draws the line between the two phases at the annuity starting date, which it defines as “the later of the first day of the first period for which you received a payment or the date the plan’s obligations became fixed” (IRS Publication 575). For an immediate annuity that date is within a year of purchase. For a deferred annuity it is whenever you finally choose to annuitize, and a great deal of the tax treatment turns on which side of that date a dollar comes out.
Immediate vs deferred annuity: the side-by-side comparison
| Immediate annuity | Deferred annuity | |
|---|---|---|
| When income starts | Typically within 1 year of purchase | At a future date you choose, or never |
| How you pay | One lump sum | One lump sum or a series of payments |
| Accumulation phase | None | Yes; grows tax-deferred |
| Main types | Fixed payment; some offer an increasing-payment option | Fixed, fixed indexed, registered index-linked (RILA), variable |
| Can you get the lump sum back? | Generally no once payments begin | Yes, less any surrender charge during the surrender period |
| Risk to principal | None from markets; the risk is dying early on a life-only option | Fixed: generally none beyond surrender charges. Indexed, RILA and variable: increasing potential for loss (Investor.gov) |
| Tax on a non-qualified contract | Each payment split by an exclusion ratio between tax-free cost and taxable earnings | Withdrawals taxed earnings-first; annuitized payments use the exclusion ratio |
| 10% additional tax before 59½ | Excepted for an immediate annuity (§72(q)(2)(I)) | Applies to the taxable part of withdrawals, with other exceptions |
| Required minimum distributions (if IRA money) | The payments themselves satisfy the RMD for that contract | RMDs from 73; a QLAC up to $210,000 (2026) is excluded until it starts paying |
| At death | Depends on payout option: life-only stops, period-certain and joint-and-survivor continue | Account value goes to the named beneficiary |
| Florida 21-day refund | Yes (§626.99) | Yes (§626.99) |
| Florida surrender-charge cap for buyers 65+ | Not applicable; no surrender value | 10% of the amount withdrawn, gone after 10 years (§627.4554(9)) |
The table is the whole argument in miniature. An immediate annuity trades liquidity for certainty: you give up the lump sum and get a payment you cannot outlive. A deferred annuity keeps the liquidity, keeps the choice, and in exchange gives you no income until you decide to take it.
How does an immediate annuity work?
You pay a single premium, usually from savings, a maturing CD, a 401(k) rollover or the proceeds of a home sale. The insurer quotes a monthly payment based on three things: your age (and your spouse’s, on a joint contract), the payout option you pick, and the interest rates the insurer is earning when it prices the contract. Older buyers get larger payments for the same premium because the insurer expects to pay for fewer years.
The payout option is the decision that matters most, and it is the one people remember least:
- Life only pays the largest monthly amount and stops at your death, whether that is forty years from now or four months. Nothing goes to anyone.
- Life with period certain pays for your life, but if you die before the certain period (commonly 10 or 20 years) runs out, the remaining scheduled payments go to your beneficiary.
- Joint and survivor pays as long as either spouse is alive, usually at 100%, 75% or 50% of the original amount after the first death.
- Cash or installment refund pays for life, and if the payments you received total less than your premium at death, the difference goes to your beneficiary.
Each guarantee you add lowers the monthly payment. That is not the insurer being difficult; it is the price of shifting risk back to them. We covered what each option does for your family after death in What Happens to an Annuity When You Die?.
What an immediate annuity does not do is grow. The premium is converted to payments on day one, and there is no account value to watch. That is a feature for the retiree who wants a pension-like cheque and a problem for the one who was hoping to keep the lump sum working. The payment on a plain fixed contract also stays the same every month for life, which means it buys less in year twenty than in year one. Some carriers offer an increasing-payment option in exchange for a smaller starting amount; whether it is available and what it costs varies by carrier and state.
How does a deferred annuity work?
A deferred annuity is two contracts stacked on top of each other: an accumulation phase that behaves like a tax-deferred savings vehicle, and a payout phase that you may or may not ever trigger.
During accumulation, the SEC groups deferred annuities into four types “in order of increasing risk” (Investor.gov):
| Type | How interest is credited | Potential for loss (per Investor.gov) |
|---|---|---|
| Fixed | A declared rate, with a guaranteed minimum | “Generally none, other than a surrender charge” |
| Fixed indexed | Based in part on an index, with a floor, subject to caps or participation rates | “Generally none, other than a surrender charge” |
| Registered index-linked (RILA) | Rises or falls with an index, with a buffer or floor | Loss possible if the index performs poorly, often subject to limits |
| Variable | You direct contributions to a menu of mutual funds | “Unlimited (based on the performance of the mutual funds selected)” |
RILAs and variable annuities are securities registered with the SEC and are sold with a prospectus. Fixed and fixed indexed annuities are insurance products regulated at state level, which in Florida means the Department of Financial Services and the Office of Insurance Regulation. We went through what can and cannot go wrong inside a fixed indexed contract in Can You Lose Money in a Fixed Indexed Annuity?.
The feature that defines a deferred annuity in practice is the surrender charge period. “If you take a withdrawal of some or all of your contract value within a certain number of years of purchasing or contributing money to your annuity, the amount withdrawn may be subject to a surrender charge” (Investor.gov). Most contracts let you withdraw a set percentage each year without the charge, often 10% of the value. Take more than that inside the period and the charge applies to the excess.
At the end of the surrender period you have three choices, and no deadline for making them:
- Leave it. The value keeps growing tax-deferred. There is no required distribution on a non-qualified deferred annuity during your lifetime.
- Take withdrawals. Systematic withdrawals of whatever amount you choose, taxed earnings-first (see the next section).
- Annuitize. Convert the value to a stream of payments under the payout options in the contract. At that point the contract behaves exactly like an immediate annuity, and the decision is generally permanent.
Choice three is the answer to one of the most-asked questions on this subject: yes, a deferred annuity can be converted to an immediate annuity, and the conversion is called annuitization. It is built into every deferred contract. You can also surrender a deferred annuity and buy a separate immediate annuity from a different carrier if its payout rates are better, which is sometimes worth doing once the surrender period is over.
What is a deferred income annuity, and what is a QLAC?
There is a third design that sits between the two, and it causes more confusion than either. A deferred income annuity (DIA) is bought like an immediate annuity, with a lump sum and a payout option chosen at purchase, but the payments do not start for several years. You buy at 62, income starts at 70 or 75 or 80. Because the insurer gets to hold the money for years before paying, and because some buyers will die before the start date, the eventual payment is much larger per dollar of premium than an immediate annuity bought at the same age. The trade-off is that you have no account value and no liquidity in the meantime: it is an immediate annuity’s permanence with a deferred annuity’s wait.
A DIA bought with IRA or employer-plan money can be set up as a qualifying longevity annuity contract, or QLAC. The attraction is the interaction with required minimum distributions. RMDs from a traditional IRA, SEP, SIMPLE or workplace plan generally begin at age 73, with the first one allowed to be delayed to April 1 of the following year (IRS RMD FAQs). The premium you put into a QLAC is left out of the account balance those RMDs are calculated on until the QLAC starts paying. For 2026, the IRS confirms that “the limitation on premiums paid for a qualifying longevity annuity contract under § 1.401(a)(9)-6(q)(2)(ii) remains $210,000” (Notice 2025-67, IRB 2025-49).
So someone with a large IRA who does not need the income at 73 can move up to $210,000 of it into a QLAC, shrink the RMDs they are forced to take in their seventies, and turn that money into a lifetime payment starting later. The regulations set a latest start age and other conditions, and a QLAC is still an irrevocable purchase, so it is a decision to make with the whole income plan in front of you rather than on its own.
How are immediate and deferred annuities taxed differently?
Both are tax-deferred, and both are taxed as ordinary income when money comes out. The difference is which dollars the IRS treats as coming out first, and it depends on whether the contract has reached its annuity starting date.
Immediate annuity, bought with after-tax money. Every payment is split between a tax-free return of your own cost and taxable earnings, using what the IRS calls the General Rule: you work out an exclusion ratio by comparing your cost in the contract to the total payments you expect to receive, and that fixed fraction of each payment is excluded from income until your entire cost is recovered, after which payments are fully taxable (Publication 575). If you bought the contract with IRA or 401(k) money instead, there is no after-tax cost to recover and every dollar is taxable.
Deferred annuity, withdrawals before annuitizing. A withdrawal from a non-qualified contract before the annuity starting date “is allocated first to earnings (the taxable part) and then to your cost (the tax-free part)” (Publication 575). A contract bought for $100,000 and now worth $140,000 has $40,000 of earnings sitting on top; the first $40,000 you withdraw is fully taxable, and only after that do you reach your own money. If you later annuitize, the payments switch to the exclusion-ratio treatment above.
The 10% additional tax. Distributions from a deferred annuity contract before age 59½ generally attract a 10% additional tax on the taxable portion (IRS Topic no. 558; for non-qualified contracts, 26 U.S.C. §72(q)). Here the two designs part company sharply. Section 72(q)(2) lists the exceptions, and one of them is a distribution “under an immediate annuity contract” as defined in §72(u)(4). Payments from a properly structured immediate annuity bought by a 56-year-old are therefore not hit with the additional tax, while a 56-year-old pulling the same amount out of a deferred annuity generally is, unless another exception such as disability or a series of substantially equal periodic payments applies. We covered the full list of exceptions, and the Florida rules on the insurer’s own surrender charge, in Can You Take Money Out of an Annuity Without Penalty?.
Florida’s contribution to this section is the simplest sentence in the article: the state “does not impose a personal income tax” (Florida Department of Revenue, GT-800025), so whatever is taxable on a Tampa retiree’s annuity is taxed once, federally.
Which one bridges the gap until Social Security at 70?
This is the most common real-world job for an immediate annuity, and it is worth spelling out because the arithmetic is on the government’s side.
Social Security pays delayed retirement credits of 2/3 of one percent for each month you wait past full retirement age, and the credits stop accruing at age 70 (20 CFR §404.313). That is 8% a year, for up to three years for someone whose full retirement age is 67, and the increase is permanent and inflation-adjusted for life.
The problem is paying the bills between retirement and 70. One answer is an immediate annuity with a period-certain only payout, no life contingency, that pays exactly from, say, 66 to 70 and then stops. The premium is modest because the insurer is only on the hook for a fixed number of months, there is no longevity risk being priced in, and the payment does the one job it was bought for. Once Social Security starts at 70 at the larger amount, the annuity has done its work. Because the annuity’s payments are substantially equal and begin within a year of purchase, the 10% additional tax is not an issue even for a buyer under 59½.
A deferred annuity can play the same role less precisely: you take systematic withdrawals from it for the bridge years. The withdrawals are taxed earnings-first, they are subject to the surrender charge if the contract is still inside its period, and if you are under 59½ the additional tax applies unless an exception fits. For most people over 59½ whose contract is past its surrender period, that works fine. For a younger retiree it usually does not.
Whether delaying Social Security is right for you depends on your health, your spouse’s benefit and your other income, which is the analysis an RSSA®-certified Social Security claiming review exists to do.
What does Florida law add for annuity buyers?
Florida’s annuity rules are among the more protective in the country, and three of them bear directly on the immediate-versus-deferred choice.
A 21-day unconditional refund on both. For fixed and variable annuities, “the policy must provide an unconditional refund for at least 21 days” (Fla. Stat. §626.99(4)(b)). For a fixed annuity that is a refund of premiums paid, including any contract fees or charges. The insurer must attach a cover page to the contract telling you the refund period exists, with the company’s contact details and the Department of Financial Services’ toll-free help line (§626.99(4)(c)). This matters most on an immediate annuity, because the 21 days are the only window in which the purchase can be undone at all.
A surrender-charge cap for buyers 65 and older. A deferred annuity issued to a consumer age 65 or older “may not contain a surrender or deferred sales charge for a withdrawal of money from an annuity exceeding 10 percent of the amount withdrawn,” and the charge must fall to zero “after the end of the 10th policy year or 10 years after the date of each premium payment if multiple premiums are paid, whichever is later” (Fla. Stat. §627.4554(9)). An immediate annuity has no surrender value for the cap to apply to, which is another way of saying its lack of liquidity is total rather than temporary.
A best-interest standard on the recommendation. The same statute requires the agent recommending any annuity to “act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the financial interest of the agent or insurer ahead of the consumer’s interest” (§627.4554(5)(a)). In practice that means the agent must document why an immediate or a deferred design fits your income needs, liquidity, age and tax situation, and you are entitled to see that reasoning.
Two more Florida facts round out the picture. The Florida Life and Health Insurance Guaranty Association covers “for deferred annuity contracts, $250,000 in net cash surrender and net cash withdrawal values” if the insurer fails (Fla. Stat. §631.717(12)(b)), a reason to split a large deferred purchase across carriers. And the proceeds of an annuity contract issued to a Florida resident are exempt from legal process under Fla. Stat. §222.14, a creditor protection that applies to both designs.
How does the timing affect your Medicare premium?
The decision between immediate and deferred income is also a decision about when income appears on your tax return, and Medicare is watching that return.
The income-related monthly adjustment amount, IRMAA, raises your Part B and Part D premiums when your modified adjusted gross income from two years earlier crosses a threshold. For 2026 the surcharge generally begins above $109,000 of MAGI for an individual filer (SSA.gov), on top of the standard 2026 Part B premium of $202.90 a month (CMS.gov). It is a cliff, not a ramp: one dollar over moves your entire year’s premium into the next tier.
An immediate annuity bought with after-tax money produces a steady, partly-excluded stream of income that is easy to plan around. A deferred annuity lets you choose which year the income lands, which is a planning advantage when you use it and a trap when you do not: one large earnings-first withdrawal in the year you turn 63 sets your first Medicare premium at 65. We worked through exactly which part of an annuity payment counts in Does Annuity Income Count Toward IRMAA?, and the IRMAA calculator shows which bracket a given year’s income lands in.
Which is better for you? A situation-by-situation guide
| Your situation | Leans toward | Why |
|---|---|---|
| Retiring within a year, need a reliable monthly amount for life | Immediate | Converts a lump sum to income now; life payout cannot be outlived |
| Want to delay Social Security to 70 and need bridge income | Immediate, period-certain only | Pays exactly the bridge years; no longevity premium; no 10% additional tax even under 59½ |
| Five or more years from needing the income | Deferred | Tax-deferred accumulation; keeps the lump sum and the choice |
| Large IRA, don’t need the RMDs at 73 | Deferred income annuity as a QLAC | Up to $210,000 (2026) sits outside the RMD calculation until it starts paying |
| Might need the money for an emergency or care | Deferred, or neither | Immediate annuities are irrevocable; a deferred contract still has a surrender value |
| Already own a deferred annuity past its surrender period | Annuitize it, or shop a new immediate annuity | Compare the contract’s own payout rates against the market before converting |
| Income already near the $109,000 IRMAA threshold | Depends on timing | Model which design keeps each year’s MAGI under the cliff |
Two honest caveats. First, “neither” is a real answer: a retiree whose essential expenses are already covered by Social Security and a pension, and who holds a healthy cash reserve, may not need either design. Second, “both” is common: a deferred annuity bought in your late fifties and an immediate or deferred income annuity bought from part of it in your late sixties is the ordinary sequence, not an exotic one. If long-term care is the risk you are most worried about, there is also a separate conversation about hybrid contracts, which we cover in Can You Use Life Insurance to Pay for Long-Term Care?.
What should you ask before you sign either one?
For an immediate annuity:
- Which payout option is quoted, and what is the monthly amount under life-only, 10-year certain, cash refund and joint-and-survivor on the same premium?
- Is the quoted payment fixed for life, and what does an increasing-payment option cost?
- Is the contract qualified or non-qualified, and what is the exclusion ratio on the non-qualified version?
- What is the carrier’s financial strength rating, given that the contract may run for thirty years?
- Where is the 21-day refund cover page required by §626.99?
For a deferred annuity:
- Which of the four types is it, and if it is indexed, what are the cap, participation rate and floor, and can the insurer change them?
- How long is the surrender period and what is the schedule, and if you are 65 or older, does it respect Florida’s 10% and 10-year limits?
- What is the free-withdrawal percentage each year?
- What are the payout options if you later annuitize, and are the payout rates guaranteed in the contract or set at the time?
- If the money is IRA money, how will RMDs be handled from 73, and is a QLAC election available?
For either, the question that decides most cases: what is this money’s job, and when does that job start? If the answer is “pay my bills, starting now,” the design is immediate. If the answer is “grow until I decide,” it is deferred. If the answer is “I’m not sure,” that is not a reason to buy either one yet.
Putting the two side by side for your own numbers
The immediate-versus-deferred question is rarely answered by the products. It is answered by your retirement date, your Social Security claiming age, your other income, which year you can afford to recognise income without crossing the IRMAA cliff, and how much liquidity you need to keep for care and emergencies. Those are the facts a payout quote does not know about you.
If you would like to put an immediate, deferred or deferred income annuity next to your actual Social Security estimate and Medicare timeline, schedule a conversation with Virginia. It is a planning session, not a sales call, and the right answer is sometimes neither.