CDs and Deferred Fixed Annuities: Which is Right for You?
You can’t turn on the news today without hearing fresh reminders of the turmoil in the markets and the broader economy. In this uncertain climate, many people are anxious to try to find a safe place for their savings.
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Two popular options are certificates of deposit (CDs) and deferred fixed annuities. Both are considered low-risk vehicles for building wealth; yet they differ in important ways. Which choice is better? The answer depends on your goals and priorities. The following information will help you determine which of these two products is best suited for your needs at this time.
- Safety of Principal: Both CDs and deferred fixed annuities are considered low–risk investments. CDs are generally issued by banks and, in most cases, are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor. Should the bank fail, the FDIC guarantees CDs up to this amount.
- Short Term vs. Long: If you’re saving toward a specific near-term objective — say, a down payment on a car or home — a CD may be the way to go. CDs offer a guaranteed interest rate over a maturity period that could range from a month to few years.
- Distribution Options at Maturity: When a CD reaches its maturity, you can take the CD’s lump sum value in cash, renew the CD for the same or different maturity period or examine other investment alternatives (such as a deferred fixed annuity).
- Taxes: Federal law treats these two savings options quite differently. If taxes are a concern, a deferred fixed annuity may be the more attractive choice. CD earnings are taxable the year the interest is earned, even if you don’t withdraw the money at that time. In contrast, earnings from deferred fixed annuities are not taxed until they’re withdrawn, giving you some control over when and how much tax you’ll pay. For specific tax advice, consult your tax professional or advisor.
Deferred fixed annuities are issued by insurance companies and are not insured by the U.S. government. They are backed by the financial strength of the issuing insurance company, regardless of the amount. Therefore, before purchasing an annuity, you should make sure the issuing insurance company is financially sound. You can determine financial strength by requesting the findings of independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch. These companies evaluate the financial strength of insurance companies and publish ratings that give their assessments of each company.
Deferred fixed annuities, by contrast, are generally designed for accumulating or protecting retirement savings. In later years, they usually offer more flexibility if you need access to your money. They can even be used to provide a legacy for your heirs.
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In a deferred fixed annuity, you may elect to withdraw your money in a lump sum or you may want to select a lifetime income option, which provides you with a flow of income that you cannot outlive. You could also elect to let your funds continue to accumulate until a need arises.