A registered index-linked annuity (RILA) is a type of insurance contract used for long-term investments. Your funds grow according to an underlying index, so your earnings depend on market performance. Generally speaking, you’d take on more investment risk with a RILA than you would with other types of annuities — but your earning potential would also be higher.
What is a registered index-linked annuity (RILA)?
A RILA is a type of indexed annuity, meaning it’s tied to the performance of a market index. RILAs generally come with higher caps and lower floors than other types of indexed annuities — like fixed indexed annuities, for example. RILAs are a type of deferred annuity, which means they’re used to generate an income stream later on.
RILAs don’t often guarantee a minimum rate of return, which means you’re generally taking on more investment risk than you would with equity-indexed annuities (EIAs), which do offer a guaranteed minimum rate.
In fact, RILAs are considered securities, so insurance brokers selling them must be registered with the Financial Industry Regulatory Authority (FINRA) in addition to their state insurance commissioner. [1]
Learn more about other types of annuities
How does a registered index-linked annuity work?
Much like other types of annuities, RILAs have two phases: the accumulation phase and the payout phase. You make payments toward your annuity in the accumulation phase, and your contributions grow based on your underlying investments. Generally speaking, you can pay with a lump sum or make payments over time, like in the case of many deferred annuities.
During the payout phase, you receive income from your annuity. At this point, you can select your payment schedule. This phase is also known as annuitization.
When you buy a registered index-linked annuity, you’ll need to review the terms of your contract — including any participation rates, caps, floors, and buffers — to get an idea of your earning potential and investment risk. [2] Your RILA contract will also have investment terms, which dictate how the insurer calculates your returns.
Participation rates
Your insurer may set a participation rate on your RILA or other indexed annuity, which dictates how much your returns are affected by market performance. For example, if you have an 80% participation rate and your selected index earned 10% in a given year, you would have 8% credited toward your annuity.
Caps
Your cap is the maximum amount of interest you can have credited to your account, even if the index overperforms. Let’s say your insurer sets a cap of 9%. If the market index earned 11% one year, your funds would only be credited the maximum of 9%.
Together, participation rates and caps can limit your earnings and your eventual payout, even if the market performs exceptionally well.
Buffers & floors
Buffers and floors each act as a safeguard to limit your losses — your insurer might set one or the other depending on your contract. Buffers detract from your loss up to a certain limit. For instance, if you have a 10% buffer and the index underperforms by 15%, the buffer would reduce the loss such that you’d only lose 5%.
In a 2023 report, the SEC found that 80% of RILA offerings featured a cap and a buffer, but some featured a floor instead. [3] Floors work similarly, but they set a maximum percentage you can lose. So if your floor is 10% and the index underperforms by 15%, you’d lose only 10%.
Surrender period & other fees
The surrender period is the amount of time that must pass before you can withdraw money from your annuity penalty-free. Surrender periods can last several years, but it depends on the insurer. Oftentimes, your surrender fee will gradually decrease over time, so you’d pay a higher penalty for withdrawals during year one than you would for withdrawals during year five.
Some RILAs may also charge an annual administrative fee, but some don’t — it depends on the insurer. [4] These kinds of administration and management fees can also detract from the income payments you receive later on. It’s important to read the terms of your contract carefully to get a sense of all fees that might apply.
Tax implications
If you fund your RILA with post-tax dollars (also called non-qualified funds), you’ll only pay taxes on the interest earned, rather than taxes on both the principal and the interest.
Learn more about non-qualified annuities
On the other hand, if you were to roll over money from a 401(k) plan or IRA and fund your annuity with pre-tax dollars (also called qualified funds), you’d pay taxes on the principal and the interest when you take a withdrawal.
Learn more about qualified annuities
The interest you earn in a registered index-linked annuity is tax-deferred, so you won’t pay taxes on your funds until you begin to make withdrawals. Because of this, you’ll also incur an additional penalty if you make withdrawals before age 59 ½ per the IRS. [5]
What are the pros & cons of registered index-inked annuities?
Registered index-linked annuities “can offer you high upside potential,” says Shawn Dye, senior manager of product marketing at Zinnia. However, “there’s no guaranteed minimum return, so someone can lose money if the market downturns.” Here are a few additional pros and cons to consider.
Pros
Tax deferral. As with other annuities, you’ll only pay taxes once you start receiving payments from your registered index-linked annuity. You won’t pay taxes on your earnings each year.
Investment potential. RILAs usually have higher caps than some other types of annuities, like fixed annuities or equity-indexed annuities, which give you more earning potential. (Although your earnings ultimately depend on market performance.)
Limited risk in terms of floors and buffers. RILAs do still come with some security in the form of floors and buffers. Unlike variable annuities, you know you won’t lose beyond a certain point.
Cons
Potential for loss. RILAs may not come with minimum guaranteed returns or principal guarantees — it depends on your specific contract and insurer.
Caps and participation rates may limit earnings. In years when the market is performing exceptionally well, caps can limit your earnings. In some cases, annual fees can affect the payments you receive, too, so you’ll need to read the terms of your contract carefully.
Contracts are complex and can vary widely. The terms of registered index-linked annuities can vary broadly across different insurers. Contracts can be difficult to understand, so it’s important to take your time learning the terms. Working with a financial advisor can help you understand the fine print of your annuity.
What should you consider before buying a RILA?
Generally speaking, RILAs offer more guarantees than variable annuities, but higher investment risk than equity-indexed or fixed indexed annuities. You should consider your overall financial needs before buying, including your age, investment goals, and risk tolerance.
Your age
RILAs are typically deferred annuities, as are other indexed annuities. This means you won’t receive an income stream immediately. If you’re at an age where you’d like to receive payments within a year, you may consider a type of immediate annuity instead.
Your investment goals
If you’d like an additional income stream down the line, you want to take advantage of tax deferral, and you’re comfortable with investment risk, you could consider a RILA. You’ll need to read the fine print of your contract to make sure your chosen insurer’s terms — especially caps and buffers — align with your goals.
Your risk tolerance
If you’re comfortable taking on some market risk, but still want some guarantees to protect you from market volatility, a RILA could work for you. If you have an even higher risk tolerance and want to invest directly in the market using an annuity, you might consider a variable annuity instead. If you have a lower risk tolerance, you may want to consider indexed annuities with more guarantees, or fixed annuities.
Who should consider a registered index-linked annuity?
“RILAs might be better for someone comfortable with more risk,” and who may be looking for higher returns than possible with other products, like equity-indexed annuities, says Dye of Zinnia.
Registered index-linked annuities have terms that can vary by insurer, so it’s important to review the parameters of your specific contract before buying. A financial advisor or annuities professional can help you determine which type of annuity is best for your financial plan.
