By Bill Broich
If safety and security of your important funds is important, 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 choice 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 CD’s is taxable whether you use it or not. Do not be fooled. A 5 year CD still gives you a 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 could 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 can 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. Again, because a cd is taxed every year, your money cannot grow on a tax deferred basis. 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.
- Income. Annuities can provide income for any time period even lifetime. In the event you live longer than expected, an annuity can keeps the income coming. Income from a bank cd can only provide income as long as there are funds available. When the account is diminished, the income stops. Unlike annuities, this vehicle cannot provide you with a lifetime income guarantee.
- 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 options for safety and security for a shorter time period than do insurance company annuities. Often a combination of short (bank cd) and long positions (annuity) can provide a higher yield overall.