Should You Invest Into a CD or Fixed Annuity

You’ve worked hard and managed to put a decent amount away.  By nature you are a very conservative investor so bank CD’s seem like the natural choice.  Right now interest rates are at historic lows so you’re open to other fixed-rate alternatives.  Investing into a fixed annuity might be the next logical choice.  Here are the differences between CD’s and fixed annuities and reasons why one or the other might be the best investment for you.

CD’s and Fixed Annuities are Fixed

Yes, CDs are FDIC-insured and offer a fixed rate of return if held to maturity. But fixed annuities come with a guarantee as well- plus the opportunity for tax-deferred growth and compounding. Keep in mind, fixed annuities are not FDIC insured. Annuities are long-term, tax-deferred investments vehicles designed for retirement purposes.

The Drawbacks of CDs.

The interest rate on CDs today is often disappointingly low – often well below 3%. Besides the pitiful return, you have another disadvantage: the interest your CD earns is fully taxable. FDIC or no FDIC, do you really want your money in a bank right now with the hassles bank customers are going through?  That’s a decision you’ll have to make yourself.   If your bank wasn’t a TARP recipient, maybe it’s not a concern.  If its, you might want to consider other options.

The Drawbacks of Fixed Annuities

When CD’s mature you have access to the money immediately.   When fixed annuities come due, if you are not 59 1/2, you will have to continue on with another term on a new fixed annuity.   The rate at that time will be determined what the going interest rates are.

But you have an alternative.

The appeal of fixed annuity. Just like a CD, a fixed annuity is designed to help grow your money over a specified term until maturity – usually five or ten years. Right now, some of these annuities are earning well over 4% interest. (The interest rate is locked in for the whole term of the annuity, unlike some fixed annuities where the interest rate is only guaranteed for one year.)

Unlike a CD, a fixed annuity gives you tax-deferred growth.

The earnings aren’t taxed until withdrawal. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges may apply and guarantees are based on the claim paying ability of the issuing insurance company.

With five- and ten-year terms, these annuities are particularly appealing to people in their fifties who are seeking a conservative retirement savings vehicle.

Be Careful of Fixed Annuity Teaser Rates

One thing that fixed annuities are notorious for is offering a “teaser” rate.  A teaser rate is where they advertise a significant higher return than you can get on any CD at any bank.  This rate is typically is just for the first year, then it resets to what the minimum rate on the contract is (which is substantially lower).  In addition, you’ve just locked in a contract with an insurance company for an extended period of time just for that one year rate.

Educate Yourself

If you think of yourself as a risk-averse investor, you might want to examine the range of options in fixed annuities. Before you make a decision, make sure you talk to a qualified insurance agent or financial professional who can explain the terms and conditions of these annuity contracts.

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