(MONEY Magazine) – First of all, let's get something straight. We believe that fixed annuities can sometimes be a sensible part of an overall investment plan. After all, once you give the insurance company your cash (typically lump sums of $1,000 to $5,000 or $25 to $100 a month), it grows tax deferred until you withdraw your money. Today, these annuities let you lock in 4.8% to 5.8% for the first year you own them. The insurers can adjust the rates up or down after that, though they usually guarantee at least 3% to 4% a year.

But nothing makes us angrier than salespeople who try to push annuities on people who shouldn't own them. We're also concerned that investors may be buying fixed annuities without understanding their fees and penalties. (For advice about variable annuities, see Your Taxes on page 153.) So here's our guide to buying fixed annuities without getting in a fix.

In general, we believe a fixed annuity makes the most sense if you fit all four of these criteria: 1) You're in your forties or older, 2) you are willing to wait seven years or more to get your money, 3) you have already contributed the maximum to tax-deferred retirement accounts such as 401(k)s, Keoghs and deductible IRAs, and 4) you already own tax-free municipal bonds.

Here's why: Fixed annuities aren't appropriate for younger people because of the 10% tax penalty you'll owe the IRS if you make a withdrawal before age 59è. You ought to keep your money in the annuity for at least seven years, since most sponsors charge steep surrender fees if you cash out earlier; the charges usually start out at 7% of your accumulated annuity earnings and phase out by a percentage point each year. We recommend people put all the law allows into their other retirement accounts and munis before investing in annuities, because these alternatives let you reduce your current taxes.

If you're ready to investigate fixed-rate annuities from different insurers, get the current issue of Annuity & Life Insurance Shopper ($20; 800-872-6684). It spells out interest rates, guarantees and surrender fees for more than 150 fixed annuities. But before calling any salesperson, pay attention to the three items that follow:

-- THE INSURER'S FINANCIAL-SAFETY RATING. Go with a company that gets a B rating or better from Weiss Research and at least A+ by A.M. Best, double A from Standard & Poor's or Moody's or AA+ from Duff & Phelps. Sticking with such solid insurers will insulate you from a company that ultimately won't be able to make payments to annuity owners.

-- THE ANNUITY'S SURRENDER CHARGES. Be sure that the annuity's initial surrender charge is no more than 7% and that the fee disappears within seven to 10 years. Some insurers include a so-called bailout clause in their contracts, letting you pull money out without owing surrender charges if your rate drops by a point or more after the first year. That's not much of a deal. If your rate falls enough to trigger the bailout clause, you'll have a hard time finding another annuity offering a better return. Plus, your surrender charges will start all over again when you switch. If you're under 59è and you don't go to another annuity, you'll owe the 10% penalty.

-- THE ANNUITY'S INTEREST RATE. Don't be seduced by an annuity paying a far higher rate than others. Chances are, the insurer is only dangling a first-year bonus rate that will sink in a year or two. If you don't mind forgoing a bit of interest in return for the ability to get out of your contract without a surrender charge, choose a one-year annuity instead of the standard seven- to 10-year version. For example, Metropolitan Life's Max One guarantees 5.25% for just the first year of its seven-year contract. Its one-year AAA Contract guarantees 4.5%.

Two annuities that meet our tests are the USAA Flexible Premium Annuity ($2,500 initial deposit, $100 minimum for additional deposits; current yield 5.7%, adjusted monthly; $30 annual maintenance fee; 800-531-8000) and First Colony Deferred Annuity ($5,000 minimum; 5.05% guaranteed for one year; 804-948-5739). Buy one of them, and you'll get a tax-advantaged investment you won't regret.

The authors write the monthly newsletter Straight Talk on Your Money ($75 a year; 800-777-2002) and are co-authors of the book Straight Talk on Money. They also serve as hosts of a daily national personal-finance show on the WOR Radio Network.