Retirees focus on investing their retirement savings securely. Even though the interest rates are lower in comparison with other investment options like deferred annuities, they like depositing their money in certificates of deposit (CDs). We will look into both these investment options and see what type is the best for you.
Safety of CDs and Deferred Annuities
Almost all of the national and international banks provide certificate of deposits at different interest rates and terms. The Federal Deposit Insurance Company (FDIC) provides guarantee for CD investments up to $250,000 (till 2013). What does it suggest? Even if the bank fails, FDIC will return the money as guaranteed in the certificate. To get this benefit, it is always encouraged to invest in several banks if you are intending to invest more than the mentioned amount.
Deferred annuities don't come with a federal guarantee such as FDIC. The financial strength of the annuity company which offers deferred annuities is the guarantor. There are private entities just like Moody's, A.M.Best, Standard&Poor's and Fitch give you the financial rating of the companies that sell deferred annuities. If you are planning to buy deferred annuities, check out whether the financial rating in the company is good enough to invest your hard-earned money and limit your choices to the top two ratings. No one has lost money in deferred annuities during this writer's lifetime.
What do annuity companies do to provide safety for deferred annuities? They come together with the guarantee association that exists in each state. Let us consider an example of Georgia Life and the Health Insurance Association. The state has organized the insurers into a guarantee pool to guarantee up to $100,000 per account holder if an insurance company fails.
Return on CDs and Deferred Annuities
The return on the investment both in CDs and deferred annuities depend on the interest rates offered by the banks/annuity companies. Normally, your CDs come with a fixed interest rate for a fixed period of time. The higher interest rate is paid for the long term deposits. The interest you earn through these CDs is taxed annually whether you take your interest or not. The tax reduce your spendable cash by 20% to 30%.
The companies marketing deferred annuities offer interest rates either for the initial period of time (typically 12 months) or for many years (multi-year guarantee annuities). There is no tax due on the interest that accumulates. Unlike CDs, your account balance grows much faster from tax-deferred investment growth when you invest in deferred annuities. However, you need pay taxes once you withdraw money from deferred annuities but you are able to take distributions and pay the tax when you desire.
Term on CDs and Deferred Annuities
The investment time frame is also one of the key components you need to consider before choosing the particular investment option between CDs and deferred annuities. You incur an early withdrawal penalty if you withdraw money before maturity of your CD or surrender your deferred annuity prior to the end of term. If you need a plan for a short time period investment, investing in CDs is the greatest option but of course, you will earn less than 1%. The deferred annuities are beneficial if you invest your money for a longer period.
Use the table below for your comparison Check for the particular interest rates on CDs and deferred annuity rates and read the penalty rules before you make a decision whether to invest about CDs or deferred annuities.
|Comparison - CDs and Deferred Annuities|
|Safety||The guarantee provided by FDIC for the investment up to $250,000 (thru 2013)||1. Depend on the financial strength of the company.
2. Few companies in certain states associate with guarantee association entities and provide guarantee for investments up to $100,000
|Interest earned||Interest rates are defined for a particular time period.||The interest rates differ from a company to company. Some offer minimum interest rate for the initial period and some for many months.|
|Tax||The interest earned on CD is taxable annually.||Tax on the earnings are deferred until the money is withdrawn. The withdrawn earning is taxable.|
|Investment Period||CDs are the best short term investment options.||Deferred annuities are the best long term investment options.|
Summary: CDs and Deferred Annuities
There is no tax involved with deferred annuities if you don't withdraw money. However, there will be 10% penalty for those aged 59½ or less on deferred annuity distributions. CDs have no such age restriction. Deferred annuities have their income taxed only when withdrawn, allowing the investor to decide when to pay tax. CDs are FDIC insured, while deferred annuities are guaranteed by the issuing insurance company.