CDs vs deferred fixed annuities: Which one for you?
December 31, 2009 by Cozey W. Baker Jr.
Money Matters
By Cozey W. Baker Jr.
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.
Two popular options are certificates of deposit (CDs) and deferred fixed annuities.# Both are considered lowrisk 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.
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.
- 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 a few years.
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.
- 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).
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.
- 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.
This educational third-party article is being provided as a courtesy by New York Life Insurance Company Agent, Cozey W. Baker Jr. For additional information on the information or topic(s) discussed, please contact Agent, Cozey W. Baker Jr.; at 9921 Dupont Circle Drive West, Suite 210, Fort Wayne, IN 46825 and telephone number (260) 416-5700 ext 245.
New York Life Insurance and Annuity Company does not provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. # Issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation).
*The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.
** CDs are FDIC insured. Fixed annuities are backed by the claimspaying ability of the issuing company.
*** Surrender charges, taxes and IRS penalties may apply. Please consult your tax advisor before making any decisions.
