By: Dennis Drake,
CBC, CFC

If you’re wondering whether the best and safest place for your money is a CD or a traditional deferred fixed annuity, the answer depends on your individual financial situation and investment objectives. Both of these options are safe savings vehicles used to accumulate wealth.

Let’s compare them.

Both CDs and Annuities are low risk savings vehicles. CD’s are generally issued by banks or credit unions. In most cases they are insured by the FDIC or NCUA up to $250,000 per depositor. CDs typically pay a stated interest rate for their term. Traditional fixed annuities are not guaranteed by the U.S. Government. They are backed by the financial strength of the issuing insurance company, regardless of the amount. The law requires insurance companies to set aside reserves for the money they guarantee, which makes them typically less financially vulnerable than banks who can loan out the money they receive from their depositors.

Additionally, most states have what is known as a state guarantee association. The purpose of the association is to provide an additional “safety net” coverage to all residents of the state who purchase certain insurance products. (Research your state guarantee association to find out the laws governing it).

CDs offer a guaranteed rate of return for a specified period of time. Interest rates vary depending on market conditions and the length of time to maturity. If a CD owner needs access to the funds in a CD prior to the maturity date, an interest penalty ranging from 30 days to six months interest is typically owed. Earnings on CDs are taxable in the year the interest is earned, even if the money isn’t taken out. When a CD matures you can take the CD’s lump sum value in cash, renew the CD, or examine other alternatives such as a traditional fixed annuity. CDs may also be subject to probate.

Traditional fixed annuities typically have a guaranteed interest rate locked in for a stated period of time. Sometimes the rate is locked in for the life of the contract, other times the rate is locked for a specific period of time. After that, the interest rate may be adjusted, generally each year with a guaranteed minimum interest rate, regardless of market conditions. A traditional fixed annuity also provides access to your money.

Withdraws during the first several years are generally subject to surrender charges. Most companies allow you to withdraw up to 10% of the contract value with no surrender charges. Some annuity contracts have a ZERO surrender charge! With a traditional fixed annuity you can withdraw the money in a lump sum or select a lifetime income option, which provides you an income that you can NEVER outlive. You can also elect to allow your funds to continue to accumulate until a need arises. Earnings in an annuity accumulates tax-deferred and are not treated as taxable income until the funds are withdrawn. Thus your principle earns interest, your interest earns interest, and the money saved by deferring tax payments earns interest. At death, the annuities account value will be paid directly to the beneficiary or beneficiaries avoiding the costs and delays associated with probate.

Both CDs and traditional fixed annuities are widely available. CDs are generally available from banks and financial institutions. Insurance agents, stockbrokers, and financial institutions all sell annuities.

As I stated in the opening line, the best place for your money depends on your own individual financial situation and investments goals that you have set forth for your money.