Fixed Annuity vs. CDs: Key Differences Between Fixed-Rate Annuities and CDs
When it comes to saving for retirement, you have many options. But two of the most popular safe money options are fixed annuities and CDs (certificates of deposit). So which is better for you?
It depends on your situation and goals. Here’s a comparison of CDs and fixed annuities to help you make the best decision for your retirement savings.
What Is A Fixed Annuity?
A fixed annuity is a contract with an insurance company that allows you to invest money in exchange for a guaranteed minimum interest rate for the contract’s life. Fixed annuities offer a guaranteed income option, including income payments for your entire life, regardless of how long you live.
Fixed annuities are designed to help you accumulate money for retirement or protect your funds after retirement. Fixed annuities are considered a safe investment and offer tax-deferred earnings, the potential for lifetime income, and a long-term time horizon.
Fixed annuities are guaranteed to earn interest at the fixed interest rate shown in your contract if you don’t withdraw your money before the term ends. While fixed annuities are not FDIC insured, they are regulated by the depart of Insurance.
Overall, fixed annuities are a good option for those who value certain guarantees, want to maximize earnings without risking principal, and have a long-term investment horizon of 1 to 10 years.
What Is A Certificate Of Deposit (CD)?
A Certificate of Deposit (CD) is a savings account offered by banks, thrift institutions, and credit unions. It has a fixed term, ranging from a few months to several years, and typically a fixed interest rate.
When you open a CD, you agree to deposit a set amount of cash for a predetermined time in exchange for a guaranteed return. The interest rate determines the return, and banks may offer higher interest rates for higher deposit amounts.
If you withdraw money before the end of the term, there may be a penalty resulting in a loss of interest or even a loss of principal. Upon maturity of the CD, you’ll receive a lump-sum payment that includes both the principal and interest earned.
CDs are popular among investors who value stable, interest-bearing investments and can afford to lock up their money for a specified period.
Fixed Annuity Rates and CD Rates: A Comparison June 2023
When comparing annuity rates vs. CD rates, looking at the issuing insurance company and bank holding your money is essential. Here is a snapshot of current rates for June by company.
Fixed Annuity Rates: June 2023
- MassMutual: 2.50%
- Reliance: 4.75%
- Athene: 4.85%
- Brighthouse: 5.00%
- Aspida: 5.10%
- Midland National: 5.15%
- American National: 5.20%
- SILAC: 5.35%
- Americo: 5.40%
- EquiTrust: 5.40%
- American National: 5.45%
CD Rates: June 2023
- Barclays: 4.00%
- Discover: 4.00% to 4.75%
- CapitalOne: 4.10%
- SoFI: 4.30%
- BMO: 4.50%
- Citizens Bank: 4.50%
- PNC: 4.50%
- CIT Bank: 4.85%
- Bask Bank: 4.85%
- US Bank: 4.95%
- CIT Bank: 5.00%
The terms of these rates differ for both vds and fixed annuities. Annuities and certificates of deposit offer flexible options when putting money in a designated account.
Both pay a guaranteed rate of return, while annuities typically offer higher rates than CDs. While annuities pay higher rates, reviewing contract terms for both investments is essential.
Benefits Of Using CDs and Fixed Annuities
Benefits of using Fixed Annuities
Fixed annuities offer several benefits to investors.
- They provide a guaranteed return rate that generally pays a higher interest rate than banking CDs.
- Fixed annuities offer tax-deferred growth, meaning that you do not pay taxes on earnings until you withdraw funds. This can help to maximize profits without risking the principal.
- Fixed annuities offer lifetime guaranteed income. Investors can convert their annuity into a stream of income managed by the insurance company, providing financial stability during retirement.
- Fixed annuities offer various terms ranging from 1-year to 10-year contract terms.
- Fixed annuities provide fixed rates guaranteeing investors fixed earnings based on the contract amount and term.
- Fixed annuities provide a safe and reliable investment option for those looking to build wealth and secure their financial future.
Benefits of using a bank CD
Certificates of Deposit (CDs) offer several benefits to investors who prefer low-risk investments.
- CDs are considered low risk because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum allowable limit, making them a safe investment option.
- With a fixed interest rate, the return on CDs is predictable, providing stability to investors.
- CDs offer various terms, allowing flexibility to align with financial goals when the CD matures.
How Are CDs And Annuities Similar?
Fixed annuities and CDs have similarities and appeal to conservative investors who prioritize a guaranteed rate of return and principal protection over aggressive growth. Both options offer guaranteed interest on the invested money, but the specific features of each may lead investors to choose one over the other.
Annuities are primarily used for retirement income and provide a steady stream of income over time, while CDs serve as short-term investments by banks and credit unions and provide a lump sum when they mature.
An annuity is purchased through an independent annuity agent, where CDs are purchased at your local bank. Both investment products pay a fixed rate of return and require a set period to earn the agreed-upon interest rate.
A fixed annuity or CD is considered a safe money investment option.
Many investors prefer the annuity due to the tax benefits and higher interest rates. At the same time, others prefer the comfort of putting their money in a bank.
No matter which option is best for you, it would help if you talked with an annuity expert to discuss all available options and to receive personalized annuity quotes.
What Are The Differences Between A CD And An Annuity?
Fixed annuities and CDs are low-risk investment options offering guaranteed returns and principal protection, but they differ in several ways.
CDs:
- CDs are Purchased at banks
- CDs are savings accounts that offer a fixed interest rate for a specified period, usually ranging from a few months to several years.
- The interest rate on a CD is typically lower than fixed annuities.
- Earnings are taxed annually.
- CDs are FDIC insured.
Fixed Annuities:
- Fixed Annuities are purchased from annuity consultants
- Fixed annuities are insurance contracts that provide a steady income stream over a period, usually for retirement purposes.
- Annuities grow tax-deferred,
- Annuities offer personalized features
- Annuities provide guaranteed regular income for a specified period or the remainder of the annuitant’s life.
- Annuities offer death benefits
- Annuities include long-term care benefits
Tax Differences Between CDs And Annuities
How CDs Are Taxed
When investing in CDs, it’s essential to understand the tax implications. The interest earned from CDs is taxable as ordinary income in the year made, even if you don’t withdraw the claim.
This means you will pay taxes on the earnings from CDs each year, even if you leave the principal in the CD.
How Fixed Annuities Are Taxed
Fixed annuities are generally tax-deferred, meaning any earnings inside the contract are not reported as income each year. However, when you take money from the agreement, you will only pay taxes on earnings from a fixed annuity.
The tax benefits in a fixed and fixed index annuity make them a desirable investment opinion over a CD.
How Do Liquidity And Penalties For Fixed Annuities And CDs Compare?
CDs offer more flexibility and liquidity than fixed annuities, as penalties for early withdrawals from CDs are lower than those for fixed annuities. Additionally, penalties for early withdrawals from CDs typically increase with each renewal, while annuity penalties are set.
Some fixed annuities allow for an annual penalty-free withdrawal of up to 10% of the invested amount.
The annuity owner needs to review the contract with the licensed insurance professional and ensure you know the difference between annuities and CDs before tying up your funds.
Are There Early Withdrawal Penalties With Fixed Annuities And CDs?
Withdrawal penalties for Fixed Annuities
Fixed annuities may come with withdrawal penalties in the form of surrender charges or market value adjustments. Surrender charges are fees imposed by the annuity provider for withdrawing funds before the end of the surrender period, which can range from one to ten years.
These charges are typically highest in the first year and decrease annually until they reach zero in the final year of the surrender period.
Additionally, if you withdraw money from a fixed annuity that was transferred from a traditional IRA or 401k with pretax dollars before the age of 59 and a half, you may be subject to a 10% early withdrawal penalty from the IRS on top of any penalties imposed by the annuity provider.
It’s essential to carefully consider the terms of your fixed annuity and the potential consequences of early withdrawal before making any decisions.
Withdrawal penalties for CDs
Withdrawing funds from a CD before maturity can result in penalty fees, which vary depending on the length of the term and the bank or credit union managing the account. The penalty for early withdrawal is usually proportional to the term’s interest, for example, the equivalent of 3 months’ interest for a 1-year CD.
Penalties often nullify any gains made, so it’s usually not a good idea to withdraw from a CD before its maturity date. Always read your contract carefully to understand the fees and penalties for your particular CD.
How To Choose Between Fixed Annuities And CDs?
Fixed annuities and CDs are popular for conservative investors who want to keep their retirement savings relatively safe. While they share similarities, they also differ considerably from one another.
A fixed annuity is a contract between you and an insurance company that offers a guaranteed interest rate for a set period. On the other hand, CDs are time deposits offered by banks and credit unions that also provide a fixed interest rate for a set period.
When choosing between fixed annuities and CDs, several factors must be considered. Firstly, consider your financial goals. If you’re looking for tax-deferred growth or to secure a steady retirement income, a fixed annuity may be better for you.
A CD may be more appropriate if you’re looking to save money for everyday use in an account that earns more than a typical bank savings account.
Consider your investment horizon. Choose a fixed annuity if you want the money paid back in retirement. If you need the money sooner, a CD may be more appropriate.
Both options offer a low-risk place to put your money, but they differ considerably in how they are taxed and liquidity. For personalized guidance on crafting your financial plan, please speak with one of our financial representatives, who can discuss your options in more detail.
Types Of Annuities
There are different types of annuities: fixed, variable, and indexed.
- Fixed annuities offer a fixed rate of return, and the income payments are guaranteed for life.
- Variable annuities offer investors the flexibility to invest in a range of investment options, including stocks, bonds, and mutual funds, and the income payments may vary based on the performance of the underlying investments.
- Fixed-indexed annuities are fixed annuities that provide a return based on the performance of a specific stock market index but have no market risk.
Fixed annuities are often compared to Bank CDs as they provide a pre-determined and contractually guaranteed interest rate for a specified period, most commonly 3-10 years. Additionally, fixed annuities typically pay higher interest rates than bank CDs, allowing investors to compound their interest tax-deferred.
Variable annuities include very high fees, which can make them undesirable. While fixed-indexed annuities are a top pick from most conservative investors as their money is protected from loss but can participate in some of the market gains.
Do CDs or Annuities Offer Higher Interest Rates?
When it comes to interest rates, both CDs and annuities offer higher rates compared to traditional savings accounts. CDs usually offer fixed rates over a set period, ranging from a few months to several years.
Conversely, annuities offer variable or fixed rates and can be purchased with a lump sum or through regular contributions.
Historically fixed annuities offer higher interest rates over the vast majority of CDs.
The interest rates for both CDs and annuities depend on various factors, such as the length of the term, the amount invested, and the current market conditions. Annuities can offer the additional advantage of tax deferral on the interest earned, resulting in higher overall returns.
Fixed index annuities can earn interest as high as 18 percent or higher in fast-growing markets.
Ultimately, the choice between CDs and annuities depends on an individual’s financial goals and risk tolerance. Researching and consulting with a financial advisor is essential to make the right decision for your investment strategy.
Why Should You Buy An Annuity?
If you’re looking for a reliable source of income during retirement, an annuity could be a good option. With an annuity, you essentially purchase a stream of regular payments to receive over a set period of time.
This can help you plan out your finances and ensure that you have a regular income for your retirement. Annuities can also provide guaranteed lifetime income, which can be particularly valuable during economic uncertainty.
Additionally, depending on the type of annuity you choose, you may be able to receive tax benefits, such as deferring taxes on the earnings until the time of withdrawal.
While annuities may not be the right choice for everyone, they can be a smart option for those who want a steady source of retirement income that they can rely on.
Why A Certificate of Deposit May Be Your Best Option?
A Certificate of Deposit (CD) is an excellent option for people who want to save money with a higher interest rate and lower risk. Banks, credit unions, and other financial institutions offer CDs ranging from 3 months to 10 years in length.
The interest rate on CDs is fixed, so customers know exactly how much they will earn during the investment term.
Another advantage of a CD is that the funds are insured by the Federal Deposit Insurance Corporation (FDIC), providing peace of mind to the depositor. CDs are less volatile than other investments, such as stocks or mutual funds, and can be a great way to diversify a portfolio.
While CDs may not offer the highest return on investment, they are a reliable and secure option for those looking to save money.
Connect With An Annuity Expert Today: Integrity Now Insurance Brokers
Integrity Now Insurance Brokers can assist in determining whether a fixed annuity or a CD is the better option for your financial goals. With the help of an annuity expert, you can compare rates and features with highly-rated insurance companies to see which policies are best for you.
Annuities offer distinct advantages over bank CDs, and speaking with a knowledgeable annuity professional can help you make an informed decision.
Contact Integrity Now Insurance Brokers for a consultation to ensure you get the top rates annuity companies offer and take the guesswork out of retirement planning.
