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Comparing Bank Certificates Of Deposit To Fixed Annuity Accounts

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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

Investment FeatureAnnuityCertificate of Deposit
Safe & Insured?YesYes
Insured By?State Insurance Guaranty AssociationFederal Deposit Insurance Corporation
Insured Up To?$250,000
Per Depositor
Per Depositor
Rates Are Fixed And Guaranteed?YesYes
Interest Withdrawals?YesYes
Grows Tax-Deferred?YesNo
Can Withdrawal Principal During Term?Yes No
Fully Liquid At End Of The Term?YesYes
Full Death Benefit To Beneficiaries At Passing?YesYes
Accepts Qualified Money Like IRAs?YesYes
Account Can Be Stretched At Passing?YesNo
Allows Additional Deposits?SometimesNo
Offers Lifetime Income Stream?YesNo
Avoids Probate?YesSometimes
Penalty-Free Withdrawals For Health Expenses?YesNo
Principal Reduced By Agent Commissions?NoNo
Early Surrender Penalties?YesYes
Currently Offers The Highest Rates?YesNo

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?

Compare CD to AnnuityBoth fixed annuities and bank CDs are safe. While they are insured by different entities, both have a solid track record of safety and reliability.

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

That being said, we are witnessing bank failures again. Two of the three largest bank failures in US history (Silicon Valley Bank & signature Bank) occurred in an instant. The largest bank failure, Washington Mutual, happened during the Great Recession of 2008.

But fixed annuities are different. 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.

Understanding Other Annuity Safeguards

Unlike bank deposits, most annuity accounts have what’s referred to as 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 bonds when interest rates increase. This means you’ll want to hold your annuity to maturity to capture its total value with interest.

And 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 don’t do this so well as we’ve seen too many times.

Which Investment Is More Appropriate For Me?

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 are in retirement.

The reason annuities might be better suited for older consumers is taxes. If you plan on withdrawing 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 can 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 for during its term, you might pay higher penalties than with a bank CD. It’s always a good idea to have your rainy day funds invested in more liquid products. But annuities usually allow penalty-free withdrawals for interest, some principal, and Required Minimum Distributions.

Annuities Are Ideal For Retirement Savings & Income

If you have not yet reached, but wish to save toward retirement – 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 at the end of their term because they grow tax-deferred.

Once retirement has been reached, 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 the insurance company. At passing, your beneficiaries would receive the entire balance of the account as a lump sum. Your beneficiaries can also choose to receive all funds over a set period of years in order to reduce income taxes.

Contact Us Today To Learn More

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

Category: Annuities, Articles

Last updated on March 13th, 2023