CDs and Fixed Annuities: Which is Right for You?
By Jerry Knoop, New York Life Insurance Company, Indianapolis South LIVING WELL Magazine
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 fixed deferred annuities#. Both are considered low-risk 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 fixed deferred 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.
Fixed deferred 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.
Fixed deferred annuities, by contrast, are generally designed for accumulating or protecting retirement savings. 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 fixed deferred 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 fixed deferred annuity may be the more attractive choice, if you plan on owning the product for a long period of time. 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 fixed deferred 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.
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).
*FDIC insured up to $250,000 per depositor per insured depository institution.
** CDs are FDIC insured. Fixed annuity guarantees are backed by the claims-paying ability of the issuing company.
*** Surrender charges, taxes and IRS penalties may apply. Please consult your tax advisor before making any decisions.
Jerry Knoop is a licensed agent with New York Life Insurance Company and a registered representative of NYLife Securities, LLC, member FINRA/SIPC, a licensed insurance agency. For more information on insurance and financial services solutions, contact Jerry at 317-459-1984 or jknoop@ft.newyorklife.com. You may also find him on the web at www.jerryknoop.com.
