The annuity is quite different from a CD. Both the CD and the annuity can be used for retirement planning, but we will attempt to explain their differences head to head.

An annuity has more investment options than a CD, right? Well it depends if the annuity is a variable annuity; then, the answer is probably yes! The variable annuity has many types of investments called separate accounts where portfolio managers can invest your money. Remember CDs and fixed annuities are usually invested in bank debts, commercial papers, or money markets. The indexed annuity usually does not offer any special investment strategies, other than the participation gains from a Stock Index (e.g. S & P 500).

Are CDs safer than annuities? Again, we need to be careful before making such a statement. An indexed or fixed Annuity is backed by the financial strength of its issuer. The separate accounts of a variable annuity are depended upon the performance of the investments inside of it. You can lose or gain money in a variable annuity. It is probably not a good idea to buy an annuity from a company with a low rating from Weiss. A CD, on the other hand, could be guaranteed up to $100,000 by the FDIC.

Will I receive a 1099 for my annuity or CD? The CD will always produce a 1099 every year, unless it is a qualified account (i.e. IRA). There is usually no tax deferral growth, on a non-qualified CD; the income earned is taxed currently, even if you roll the CD over. With an annuity, you may not pay taxes in the current year, unless you make a withdraw. Consult your tax consultant to decide what investment strategy is best for you.

The CD market has changed quite a bit. Brokerage CDs have entered the market. They can be traded in the secondary market like bonds. But be careful, you can lose money by trading these instruments, unless you hold it to maturity.

An annuity has the pleasure of being able to avoid probate if you have a named beneficiary. A CD that is considered qualified money will enjoy this same privilege. The annuity allows an individual to grow money on a tax deferred basis. A bank CD is protected by FDIC, if the bank has been approved for their insurance protection. When buying an annuity or CD, please seek a financial professional to make sure it fits in your overall financial goals.

*Disclaimer: This article does not constitute financial advice. Always consult a tax advisor or financial advisor when making any investment decisions.

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