Comparing Bank CDs To Annuity Accounts

If you’re looking for a safe and insured fixed-interest account, you’ll want to compare fixed annuity accounts to bank CDs. Both offer pros and cons depending on what features are most important to you.

The chart below compares the advantages and disadvantages of both accounts side by side. It’s important to know that fixed annuities usually offer higher interest rates than CDs. They also allow owners to defer taxes, but their surrender penalties are higher overall.

Fixed Annuity Versus Bank CD

Do Bank CDs Or Annuities Offer The Best Rates?

We are currently in a historically high interest rate environment. This impacts yields for all fixed-income accounts. If you have a CD coming due or are shopping for the best money market account, you know rates are high right now. Better than we’ve seen in 20 years. These higher rates are also positive for fixed annuities.

Fixed annuities can be advantageous as they are oftentimes more versatile than bank funds. They primarily invest in government treasuries, but they also purchase highly-rated corporate debt. Smaller annuity companies are even more agile. They can purchase smaller tranches of high yielding debt that might not suit larger companies.

This translates to better fixed rates for most annuities. By tapping into multiple debt markets, their portfolios offer better returns. Those returns filter down to consumers. It’s common to see a five-year annuity yield well over 5% while banks are half of that at best.

What About Safety Of Principal & Interest?

Both fixed annuities and bank CDs are safe. They are both insured and offer a solid history of safety and reliability.

In most states, annuity accounts are insured to $250,000 per contract. Whether it’s FDIC, or your annuity State Guaranty Association, you have significant protection.

That being said, the US has experienced bank failures over time. Two of the three largest bank failures in US history (Silicon Valley Bank & Signature Bank) occurred recently and in an instant. The largest bank failure, Washington Mutual, happened during the Great Recession of 2008.

Fixed annuities are different, however. They primarily purchase government treasuries. The United States government would have to default on its debt for insurance companies to lose solvency. That scenario is unlikely. The government can always print more money if it needs to. This is why annuity (insurance) companies rarely fail.

Understanding Other Annuity Safeguards

Unlike bank deposits, most annuity accounts include a Market Value Adjustment. We won’t go into great detail here; you can click on the term to learn more. But in a nutshell, this is a way for insurance companies to mark down (decrease the value) of bonds when interest rates increase. This means you’ll want to hold your annuity to maturity to capture its total value, including interest gains.

Annuities also have decreasing surrender penalties while they mature. These penalties, along with the Market Value Adjustment, prevent runs on the insurance company. These two features are designed to protect investors and the insurance companies issuing annuities. Banks can’t do this. That’s why they are more prone to failure.

Which Investment Is More Appropriate?

Annuities offer more features and flexibility than CDs, but they aren’t necessarily the most appropriate account for everyone. Typically, younger consumers will purchase CDs. Annuities are more appropriate for those saving toward, near, or in retirement.

The reason annuities might be better suited for older consumers is taxes. If you plan to withdraw funds from your non-qualified annuity before age 59 1/2, you can face IRS penalties on top of any income taxes due. After age 59 1/2, owners can withdraw funds with no penalties. CDs do not have these restrictions.

Whether an annuity is funded with pre- or post-tax dollars, owners can run into IRS issues based on this age threshold. It’s wise to consider tax implications if you’re unsure about withdrawals. We will help you better understand some of the tax implications annuities have that CDs do not.

Annuities typically have higher surrender penalties, as mentioned. If you need to withdraw more than the account allows, you might pay higher penalties than with a bank CD. It’s always a good idea to have rainy-day funds invested in more liquid products.

However, annuities usually allow penalty-free withdrawals for interest, some principal, and Required Minimum Distributions. Many already include these liquidity features, but where they don’t, consumers can add them at a small cost.

Video: Comparing Bank CDs To Fixed Annuities

If you already own a fixed annuity, you know how they work. They are safe and reliable policies designed for risk-averse investors. While they most closely resemble bank CDs, they are different in several ways. Many of these differences are advantageous for the owner. Watch this short video to understand the similarities and differences between the two:

Annuities Are Ideal For Retirement Savings & Income

If you have not yet reached retirement age, but are saving for the future, then an annuity account can be a wise choice. Your interest will compound through tax-deferred growth each year. Compound growth is a big advantage annuities have over CDs. All things being equal, fixed annuity accounts will be worth more due to compounding tax-deferred growth.

Once you’ve retired, your annuity balance can be converted into a lifetime stream of income if you wish. This is not required, of course. It is an option. You can also withdraw your interest each month and leave the principal intact. You might also initiate a 1035 tax-free exchange and invest in a new annuity that suits your needs.

Your accumulated principal and interest always belong to you – never to the insurance company. Upon passing, your beneficiaries would receive the entire account balance as a lump sum. Your beneficiaries can also choose to receive all funds over a set period of years to reduce income taxes.

Contact Us Today To Learn More

Hyers and Associates is an independent annuity brokerage. We help our clients better understand the distinct advantages annuities offer over bank CDs. We will help you compare the best rates and features with highly-rated insurance companies to see which policies are best for you.