A Registered Index-Linked Annuity (RILA), often referred to as a "buffered" or "structured" annuity, is a tax-deferred retirement savings vehicle that occupies a unique middle ground between the safety of fixed annuities and the risk of variable annuities. RILAs have become one of the fastest-growing segments in the retirement industry because they allow investors to customize their exposure to market risks.

According to Investor.gov, a RILA is a contract between an investor and an insurance company where returns are linked to the performance of a stock market index, such as the S&P 500, but with defined limits on both losses and gains.

How RILA Annuities Work

RILAs are designed to limit—but not eliminate—investment risk. Unlike variable annuities, where you are directly invested in sub-accounts and can lose all your principal, and fixed indexed annuities, which guarantee zero loss but offer lower growth potential, RILAs share the risk between the investor and the insurance company.

Downside Protection: Buffers and Floors

The defining feature of a RILA is how it handles market losses. Insurance carriers typically offer two types of protection strategies:

  1. Buffers: A buffer absorbs the first portion of a market loss.For example, if you select a strategy with a 10% buffer and the market drops by 8%, you lose nothing.However, if the market drops by 15%, the insurer absorbs the first 10%, and you are responsible for the remaining 5% loss. This structure is popular because it protects against standard market corrections while leaving the investor exposed to catastrophic crashes.

    Floors: A floor sets a maximum limit on how much you can lose.If you select a strategy with a -10% floor, you are exposed to the first 10% of market losses.If the market drops 20%, your loss stops at 10%, and the insurer covers the rest. As noted by Corebridge Financial, this offers protection against severe market downturns but exposes the investor to smaller, more frequent losses.

Upside Potential: Caps and Participation Rates

In exchange for this downside protection, the insurance company limits your upside potential. This is typically done through:

  • Cap Rates: A maximum percentage of return you can earn. If your cap is 15% and the market rises 20%, your return is limited to 15%.

  • Participation Rates: A percentage of the index's gain that is credited to your account.If the participation rate is 80% and the market rises 10%, you are credited with 8%.

The specific rates are often set for a specific term, such as 1, 3, or 6 years.Transamerica highlights that these features allow investors to tailor their portfolios to their specific risk tolerance and time horizon.

Pros and Cons of RILAs

Before investing, it is critical to weigh the advantages against the limitations of these complex products.

The Benefits

  • Tailored Risk Control: Investors can choose the exact level of protection they want (e.g., a -10% buffer vs. a -20% buffer) often adjusting their upside potential accordingly.

  • Higher Growth Potential: Compared to fixed indexed annuities, RILAs generally offer higher cap rates and participation rates because the investor is accepting some risk of loss.

  • Tax Deferral: Like all annuities, investment gains within a RILA grow tax-free until they are withdrawn, allowing for faster compound growth.

The Drawbacks

  • Risk of Loss: Unlike fixed annuities, you can lose money in a RILA if the market drop exceeds your buffer or floor.

  • Complexity: The variety of crediting strategies, index options, and term lengths can be confusing. FINRA warns that the "bounded return structure" can be difficult for some investors to fully understand without professional guidance.

  • Liquidity Constraints: RILAs typically come with surrender charges that last for several years (often 5 to 7 years).Withdrawing money early can result in steep penalties.

Tax Implications

The tax treatment of a RILA is consistent with other annuity products.

  • Tax-Deferred Growth: You do not pay taxes on interest or investment gains while the money remains in the contract.

  • Ordinary Income Tax: When you withdraw funds, gains are taxed as ordinary income, not at the lower long-term capital gains rates.

  • Early Withdrawal Penalty: If you withdraw money before age 59½, the IRS typically imposes a 10% penalty on the earnings in addition to regular income taxes, as outlined by Brighthouse Financial.

Market Leaders and Availability

The RILA market has seen explosive growth, with sales recently surpassing traditional variable annuities in some quarters. Major insurance carriers dominating this space include:

  • Equitable: Known for their "Structured Capital Strategies," they were an early pioneer in the RILA market.

  • Allianz Life: Offers popular products like the "Allianz Index Advantage."

  • Brighthouse Financial: Their "Shield" annuities are widely distributed.

  • Prudential: A key player with their "FlexGuard" series.

  • Lincoln Financial: Offers the "Level Advantage" line of RILAs.

According to LIMRA, these companies consistently rank among the top sellers by volume, driven by the increasing demand for investment vehicles that offer a compromise between safety and growth.