With all the volotility in the stock market these days, people are seeking a safe place for their retirement money. Many options exist, but today we’ll just compare two common financial vehicles that guarantee preservation of principal.
If you’re looking for a secure place to put funds, certificates of deposit (CDs) and fixed annuities are common choices, especially for those seeking safety in relation to other investments. It’s important to understand the differences between a CD and a single premium deferred annuity as they can look very similar.
Let’s compare a few features of each, as they have strengths and weaknesses that are very different. Reviewing these against your goals and objectives will help you make a more informed decision:
Both a CD and a single premium deferred annuity, a particular type of fixed annuity, offer guaranteed fixed rates based on the length of term selected, with longer terms typically enjoying higher interest rates. Certain annuities have rates that are locked in for all years of their policy term; however, others can adjust up or down each year, while always providing a minimum guarantee. One important advantage annuities have over CDs is their tax-deferred growth. Interest earned from CDs is taxable in the year the interest is earned, whether you take the interest out or allow it to accrue. Earnings from a deferred annuity accumulate tax-deferred and are not considered taxable income until withdrawn, if ever. This allows you to defer paying taxes on the investment until you decide, and enjoy the benefits of triple compounding interest.
Generally, fixed annuities provide a much greater rate of return than a CD. Many offer a substantial bonus interest rate to encourage quick growth. All annuities are insured by an insurance company, so it is important to select an insurance carrier with a high financial rating and long, stable history. Your insurance agent will know what insurance companies can provide the greatest comfort of security.
Finally, and maybe most importantly, the end of the term options for distribution of funds from a CD and an annuity are very different. When a CD or fixed annuity matures, investors can withdraw those funds to place into another investment, or renew the policy for another term. Some annuities allow you the option to stay in the policy and continue receiving interest while no longer applying surrender charges, so you have access to your money, if needed. Annuities also provide the option for a payout over a number of years or a guaranteed lifetime income option, which CDs do not.
These are just a few of the factors to consider when making your selection between a CD and a deferred fixed annuity. Always consult with your tax advisor on the tax implications of any investment.
If you would like a complimentary review for your situation, please contact Ben Rosky at 602-996-6010.
Here is a fun, 2 minute video on the topic:
Some of this content provided via Comparing CDs to Fixed Annuities | AAA Arizona.
Video courtesy of annuitythinktank.com