Should You Choose an Annuity or a Bank Certificates of Deposit?
If the safety and security of your vital funds is essential, which should you choose to hold your funds, banks or insurance companies?
While there is no “correct” answer for everyone, both choices have benefits. Your decision should be based on your specific situation and goals.
Both banks and insurance companies are highly regulated and insured. The choice should be based on your specific needs.
- The already low interest paid on CDs is taxable whether you use them. Do not be fooled. A 5 year CD still gives you 1099 every single year. Annuities are only exposed to tax liability when the funds are accessed, either by the annuity owner or later to a named beneficiary.
- In many states, an annuity has some level of exemption from creditor liens and judgment. The amount that can be protected varies based on your state of residence. A CD can be garnished or seized. In most situations, a bank cd is an exposed asset to creditors.
- Unless you specify named beneficiaries, your CD may be subject to probate expenses. Annuities are contracts, and you are allowed to name a beneficiary. Named beneficiaries may receive the proceeds without probate expense or time delay.
- The interest on your CDs may reduce your Social Security benefits. Again, because you are given a 1099 each year, this interest on your CD is considered income. Therefore, this income may push you into a higher tax bracket which could reduce your Social Security benefits because of the higher taxes you may be forced to pay. Unless you are in need of the earned interest, consider an annuity; interest earned annually is not considered income until the funds are touched.
- Your CD cannot give you triple compounding, but an annuity can. Annuities are tax-deferred, allowing you to defer the tax liability, earn interest on taxes you didn’t have to pay, and interest on the deferred interest. Again, because a cd is taxed every year, your money cannot grow on a tax-deferred basis.
- Income. Annuities can provide income for any time period, even a lifetime. In the event you live longer than expected, an annuity can keep the income coming. A bank cd can only provide income as long as funds are available. When the account is diminished, the income stops. Unlike annuities, this vehicle cannot guarantee a lifetime income.
- Bank CDs have no catastrophic clauses. For the most part, CDs will not let you liquidate without penalties; annuities have contractual guarantees that allow for access under specific conditions, such as a prolonged nursing home stay.
- Bank CDs provide safety and security options for a shorter period than insurance company annuities. Often a combination of short (bank cd) and long positions (annuity) can provide a higher yield overall.
I use bank CDs constantly to park money and to help my clients with short-term money rates. The best place to find the highest available bank rates is at www.bankrate.com
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