When it comes to your money, you have a ton of options. Should you invest it? Should you choose to invest in an annuity? Should you invest in a Certificate of Deposit? Here’s an explanation of what they are and a few reasons why you should invest in an Annuity over a Certificate of Deposit.
What They Are
A Certificate of Deposit, or CD, is a time deposit. They’re similar to a savings account because they’re insured and risk free. They’re different from a savings account in that the CD has a fixed term (monthly, quarterly, annually, or longer) and a fixed interest rate. It’s held until maturity and can then be withdrawn along with the interest accrued.
An annuity is when an individual pays a life insurance company a single premium. That premium will later be distributed back to the party over time. You can set the annuity to be distributed over a specific amount of time via fixed payments, until your death, or until the contract’s final date.
Interest Rate Bonuses
Image via Flickr by 401 (K) 2013
Annuities and Certificate of Deposits have similar interest rates, but fixed-annuity accounts offer a first-year bonus rate. It may not sound like a lot initially, and that’s the truth. However, your the interest compounds over the year of the annuity. Fixed-annuities also offer a minimum rate of return, which helps you budget future income. Certificate of Deposits are subject to whatever the rates are at that time.
Sometimes, the unexpected happens. In times like that, it’s nice to know that you have options. With a Certificate of Deposit, you don’t have that option without incurring penalties. With tax-deferred annuities, that’s not the case. Depending on the type of annuity and the provisions, there may be some options that allow you to withdraw a portion of your funds completely free of any sort of penalties.
No Impact on Social Security Benefits
With a Certificate of Deposit, the interest income is included in the calculations used to determine taxation on your Social Security benefits. Taxable and tax-free earnings are both reportable and must be included in this calculation. With a tax-deferred annuity, the interest income isn’t reportable until it’s withdrawn. It’s not included in the calculations for Social Security crossover taxation, which preserves the value of your Social Security benefits.
Taxing and Reporting
Certificates of Deposits are reportable and taxable as it’s earned, regardless of whether it’s received or you’re leaving it there to build up. The interest income from tax-deferred annuities is not required to be reported and is not taxable until it’s withdrawn. The advantage here is that when it’s withdrawn, the account holder is likely no longer in their peak earnings years, so they’re in a lower tax bracket.
Multiple Types to Fit Your Needs
Unfortunately, there’s only one type of Certificate of Deposit. You’re extremely limited with your options. With annuities, that’s not the case. As you might imagine, it’s important to know the Fundamentals of Annuities. There are multiple types of annuities:
- Immediate Annuities – These begin payments for life or for a specified amount of time. Payments can be received monthly, quarterly, semi-annually or annually.
- Deferred Annuities – These can be funded through a single premium or through flexible payments distributed over months or years. These can help you accumulate money for retirement.
For premium payment methods, there are several options:
- Single Premium Annuities – These can provide you with a way to turn a large amount of cash into guaranteed income. This option is great for those with cash from a legal settlement, a business sale, or money that has been inherited, and can fund either an immediate or deferred annuity.
- Flexible Premium Annuities – These are funded over a period of time and allow you to pay premiums of different amounts, either on a schedule or randomly. These can fund fixed or variable deferred annuities.
When assets are invested, there are several options:
- Fixed Annuities – These guarantee you a specified rate of interest for a certain amount of time and can preserve your assets and protection from market volatility.
- Variable Annuities – These provide you with a greater opportunity for asset growth through multiple investment choices. Of course, with greater growth comes greater risk.
In many ways, it’s plain to see that annuities hold a clear advantage over certificates of deposits. If things come to a pinch, you’ll be able to get the money you need. Annuities won’t impact your social security benefits, you’ll get interest rate bonuses, and the interest isn’t required to be reported until you withdraw it later in life. What has your experience been with these two financial products?
Author Jane is a freelance writer who loves to write about anything from tech to mommy stuff. She is featured in many blogs as a guest writer, and can write with authority on any niche or subject.