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Comparing Bank Certificates Of Deposit To Fixed Annuity Accounts

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If you are looking for a safe and insured fixed interest investment account, you should compare a bank CD to a guaranteed fixed annuity account.

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.

Annuity accounts typically offer much higher interest rates than CDs. They also allow owners to defer taxes, but their surrender penalties can be 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?$300,000
Per Household
$250,000
Per Depositor
Rates Are Fixed And Guaranteed?YesYes
Interest Withdrawals?YesYes
Can Withdrawal Principal During Term?Yes No
Liquid To The Owner 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
Grows Tax-Deferred?YesNo
Allows Additional Deposits?SometimesNo
Offers Lifetime Income Stream If Desired?YesNo
Avoids Probate?YesNo
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 low interest rate environment that impacts yields for all fixed income accounts. However, banks have been hit the hardest – and there’s no end in sight. If you are renewing a CD or invested in a money market account, you know bank rates aren’t great. And one wonders how the banks will hold up if there’s another recession.

Fortunately, fixed annuities are more versatile than banks. They primarily invest in government treasuries, but they also purchase highly-rated corporate debt as well. Smaller annuity companies are even more nimble and can purchase smaller tranches of 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 not uncommon to see a five year annuity yield 3-4% while banks are half of that at best.

What About Safety Of Principal & Interest?

Compare CD to AnnuityBoth fixed annuities and bank CDs are very 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 State Guaranty Association, you have some protection.

That being said, we did see some bank failures during the great recession. And since annuities primarily purchase government treasuries, the United States government would have to default on their debt for annuities to run into trouble. That scenario is unlikely. The government can always print more money if they need to.

Which Investment Is More Appropriate For Me?

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

The reason annuities might be better suited for older consumers is simply taxes. If you plan on withdrawing funds from your 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 that age threshold. So it’s wise to learn about any tax implications if you are unsure of when you might take withdrawals. We can help you better understand some of the tax implications annuities have that CDs do not.

And annuities typically have higher surrender penalties. Especially those that offer the best rates. If, during the term, you need to withdraw more than the account allows for, you might pay more 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, but it is an option. Or you can withdrawal your interest each month and leave the principal intact. You could also initiate a 1035 tax-free exchange and invest in a new annuity that suits your needs.

Your accumulated principal and interest always belongs 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 can 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 what contracts are best for you.

Category: Annuities, Articles