Which is better – the CD or the Fixed Annuity?
Like many decisions in life, the answer as to which path to take to secure your financial future is often “it depends.” In thinking about investing in certificates of deposit versus deferred fixed annuities or CD vs Annuity, the factors to take into consideration include your age, your financial situation, your planned time of retirement, and your overall investment goals. Both of these savings tools can be used to grow and preserve your wealth. But each goes about it in very different ways. Here are some things that you should think about before making your decision:
1.
How safe is my money? One factor that both CDs and deferred fixed annuities share is their low risk. CDs in general are issued by banks and come with insurance for up to $250,000 from the FDIC (Federal Deposit Insurance Corporation). Insurance companies issue deferred fixed annuities, and unlike CDs, the entire amount of annuity is backed by the financial strength of the insurance company that issues the annuity.
2.
Am I seeking a short-term gain? If you’re looking to save money for a short-term goal, such as making a down payment on a house or a car, the CD is the better option for you. CDs are issued with a variety of maturity periods, from as long as several years to as short us just one month.
3.
Am I seeking a long-term gain? If your savings period is longer than a few years and for retirement, the deferred annuity is often the better choice. Deferred annuities can help you to save money for your retirement, and can help you to protect your savings even after you’ve retired. You can even use them to provide a lasting legacy for your heirs.
4.
What sort of growth am I seeking? While both CDs and deferred annuities offer growth at decent interest rates, deferred annuities often result in better growth over the short and long term. CDs provide a guaranteed rate of return over the period of the CD, with lower returns for short-term deposits and higher returns for longer periods. But interest rates also vary depending on what’s happening in the economy, and there are no guaranteed interest rates if you choose to renew your CD. With deferred annuities, on the other hand, your interest rate is guaranteed and locked in for an initial period. After that, your interest rates adjust regularly – usually about once each year. Annuities also offer a guaranteed minimum interest rate, so no matter what happens in the economy, your growth never drops below what you agreed to when you purchased the annuity.
5.
How will that affect my taxes? There’s a big difference between how earnings from CDs affect your taxes versus deferred fixed annuities. The earnings you get from a CD are taxable in the year that they were accumulated – even if you don’t take the money out! By contrast, fixed annuities permit your earnings to grow on a tax-deferred basis, meaning you pay no taxes on them until you actually take the money out. So you choose when you want to pay taxes - not the government. CDs and deferred fixed annuities also differ in how they affect the taxes on your Social Security benefits. Interest earned from a CD counts in the calculation of taxes on your Social Security benefits. But with a
deferred fixed annuity, you have the ability to lower your taxable income, and keep it under the threshold that triggers taxation of your Social Security benefits. And when you die, any money you have in CDs can be subject to probate, while the full value of your annuity account can be paid directly to your named beneficiary. That saves money and time for your loved ones. Estate taxes apply to both CDs and fixed annuities, though, and of course, you must pay income tax on the earnings from a fixed annuity when you make a withdrawal. 6.
Can I get my money early if I need to? With a CD, you always have access to your money. But if you need to withdraw all or part of your money prior to the scheduled maturity date, you could be subject to a penalty that ranges from 30 days’ worth of interest to as much as six month’s worth. With a fixed annuity, you also have ready access to your funds if the need arises, but in general, taking a portion of the money out – usually 10% - during the first several years of the contract can be done with no surrender charges. When the surrender period is over, you can access your funds at any time without having to worry about paying penalties.
7.
How do get my money at the maturity date? When a CD matures, you can take the money out in one lump sum, or you can renew the CD for another period of time. With a deferred fixed annuity, you can also choose to take out your money in a lump sum, but you can also choose from a variety of income options to provide a flow of money that you are guaranteed will last as long as you live. And you can leave the money alone, letting it accumulate interest until the need arises or to pass along to your heirs.