Annuity versus the CD

An annuity is quite different from a CD. While both the CD and annuity can be used for retirement planning, let us look at their differences.

Most believe an annuity has more investment options than a CD?The answer might be yes, depending on whether the annuity is a variable annuity. Generally, the variable annuity possesses several investments options called separate accounts. These are market sensitive investments; therefore you can lose money. On the other hand, a CD is invested in bank debts, commercial papers, or money markets, but a fixed annuity can be invested in a similar manner. An indexed annuity offers an investor some level of participation in a Stock Index (e.g. S & P 500).

Is a CD safer than an annuity? Again, we be careful before making such a statement. An indexed or fixed annuity isbacked by the financial strength of its issuer (insurance company). The variable annuity is depended on the performance of the (separate accounts) investments inside of it. Therefore, it is possible to gain or lose money in a variable annuity. You might want to stay away from an annuity from an insurance company with a low rating from Weiss. In contrast, a CD is guaranteed up to $100,000 by the FDIC. If the bank should fold, you can expect to get the balance of your account up to $100,000.

Will I receive a 1099 for my annuity or CD? A non-qualified CD will produce a 1099 every year. With an annuity, you may not be required to pay taxes in the current year, unless you make a withdraw. Always consult your tax consultant to provide tax advice.

Brokerage CDs are now in the market. They can be traded in the secondary market like bonds. But be careful, you can lose money by trading these instruments, if you sell them before reaching maturity.

With a living named beneficiary, an annuity can avoid probate. A qualified (IRA, SEP-IRA, etc.) CD account may enjoy this same privilege. This annuity allows an individual to grow money on a tax-deferred basis. While a variable annuity might possess more individual choices, in regards to investing, the fixed and indexed annuity are at the mercy of the issuer and their investments. If a bank is insured by FDIC, the CD balance will be protected up to the lesser of its the balance or $100,000.

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