A Comparison of Annuities and Certificates of Deposit (CDs)

Similarities:

Fixed Annuities and CDs are low risk investments with guaranteed rate of returns based on interest rates, both are issued by financial institutions, CDs by banks, Annuities are offered by insurance companies. CDs have FDIC protection to guard against Bank failures. Annuities also have safety measures put in place by each State to ensure Insurance companies have reserve pools in place. The guarantee for annuities is based on the claims paying ability of the issuer. Investors can compare the financial strength of Insurance companies using the ratings from firms such as Standard & Poor's, Moody's, A.M. Best, etc.

Differences:

Annuities carry several benefits.

Generally higher returns
Tax-Deferral of earnings
Potential liquidity

Higher Returns:

Fixed Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns, but annuities have a minimum guarantee in place, usually 3% or 4%. Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates.

Tax-Deferral:

You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With Fixed Annuities, there is also a set term, but the earnings are tax-deferred. You only pay taxes on interest earned when money is withdrawn. So with Fixed Annuities the deferred tax on your interest remains in the investment potentially earning you more money, instead of being paid out to state and federal tax agencies on a yearly basis.

Potential Liquidity:

CDs do not allow you to withdraw any monies during term. Some annuities have provisions that allow you to withdraw money, generally 10% of your account value annually. Plus many contracts allow you to remove the earned interest on a monthly basis, of course if you do, it becomes taxable income. Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner and/ or his or her spouse, or over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security.

Russell Hill writes articles on a variety of subjects including fixed annuities, variable annuities, indexed annuities and other retirement investment vehicles. More information on annuities can be found at: http://www.annuity-strategies.com

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