Fixed Annuities vs. CDs

A fixed annuity is a retirement savings vehicle that provides tax-deferred accumulation at a guaranteed fixed rate for a predetermined period of time (typically 2 to 10 years). In other words, the interest earned in your fixed annuity is not taxed until withdrawn, and the rate of return is guaranteed over the course of the multi-year term selected. It is most similar to a Certificate of Deposit (CD), which is offered by a bank or other-FDIC insured institution, except that it is offered by an insurance company. The fixed annuity guarantee is backed by the financial strength of the insurance company, which is best understood through its financial rating.

Tip: You might hear this product referred to using a few different names:

• Fixed annuity
• Fixed deferred annuity (FDA)
• Fixed rate annuity
• Multi-year guaranteed annuity (MYGA)
• Single premium deferred annuity (SPDA)

Fixed annuities are a useful tool for retirement savings. They provide a safe, tax-advantaged way to earn a good return on savings needed in the future.

Guaranteed, Strong Return

The money you invest in a fixed annuity will accumulate at a fixed rate, which is specified upfront and guaranteed until the end of the rate guarantee term.

Tax-Deferred Growth

From the government's perspective, an annuity is a retirement savings vehicle. No taxes are paid until distributions are made. For a fixed annuity, this means that interest will accumulate and compound without incurring annual taxes.

Principal Protection

Unlike with most other investments, there is no market risk associated with a fixed annuity. Your principal is protected and guaranteed to accumulate at a fixed rate, making fixed annuities a good place to park retirement money you don't want to risk losing.

Some Liquidity

Fixed annuities provide some liquidity, typically making interest earned or 10-15% of the contract's cash value available penalty-free annually if you're over 59½. The rest of the contract is available, but subject to surrender penalties.

Easy to Understand

There are a lot of complex products, but a fixed annuity is one of the easier ones to understand. Assuming you leave your money in the fixed annuity until its guaranteed rate term ends, all you need to know is (1) how long until your money is available and (2) what your return will be over that period of time. There are no hidden fees that you need to worry about.

Penalties for Withdrawals Under Age 59½

Fixed annuities are really meant to be used for retirement savings. The IRS issues a 10% penalty on gains withdrawn from a fixed annuity for account holders under age 59½.

A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions that holds a fixed amount of money for a set period of time, typically ranging from a few months to several years. Over the course of the agreed upon term, the bank pays interest, which is usually higher than a traditional savings account. When the term is up, the account holder can withdraw the money and any interest earned, renew the CD, or open a new one with different terms.

Fixed annuities and CDs both provide a guaranteed interest rate, while protecting your principal from market fluctuations. However, fixed annuities are designed for long-term savings goals (like retirement) and their growth is tax-deferred, whereas CDs are typically for short or intermediate goals and their interest is subject to income tax each year. While annuities are guaranteed by their issuing insurance company, CDs are FDIC insured.

One of the main benefits of a fixed annuity is its tax-deferred status. Any earnings or gains in the annuity are not subject to taxes until you withdraw the money. This means your investment can grow faster because you aren't paying taxes on your gains each year. It's like investing in an IRA or 401(k) but with no contribution limits. This means you can invest as much as you want (subject to the annuity provider's minimum investment requirements) and potentially grow your retirement savings faster.

The interest earned on a CD is considered taxable income, regardless of whether the money is received in cash or reinvested. If the term of the CD is longer than one year, the interest earned must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Any guarantees made by an insurance company are subject to the financial strength of the insurance company and their claims paying ability. Additionally, each state does have its own guaranty fund, but it should not be thought of as a substitute for FDIC insurance, which annuities do not have. State guarantee fund rules vary significantly state-by-state. You can find more state specific information here.

Blueprint Income is here to help guide you through the process; it's part of the service and commitment we provide to our clients. We will contact you in advance of your policy reaching the end of its guaranteed investment term and provide you with information on options available to you. In general, at the end of the guaranteed interest rate term, you can do any of the following: rollover your funds into a new fixed annuity, annuitize your policy, do nothing and let your policy auto-renew, or cash out your funds. The best option for you will depend on your age and your goals for the proceeds of your fixed annuity. To learn more about the options, head to this article