If you're having a hard time choosing between a fixed deferred annuity and a certificate of deposit (CD), it's best to examine your financial needs and objectives. Each option has distinct advantages and disadvantages. For our discussion, let's compare a non-tax qualified single premium fixed deferred annuity, earning an annually renewable fixed rate of return, with a non-tax qualified bank CD.

Both fixed deferred annuities and CDs offer low risk. CDs are usually issued by banks and often insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor. Insurance companies issue fixed deferred annuities and you are relying on their financial strength, not the FDIC, to insure your investment. For this reason, it is crucial that you verify the stability of the issuing company by using an independent rating company, such as Standard & Poor's or Moody's.

Consider the length of time you want to tie up your money. If you were saving for a vacation, you would probably choose a CD over a fixed deferred annuity. CDs are more attractive for short-term savings goals. Maturities can vary from one month to several years, which make CDs ideal for saving for specific time periods. Fixed deferred annuities, however, are generally the better choice for longer-term savings. Annuities are structured to help you save for retirement or protect monies already saved.

CDs are secure and conservative because they provide a guaranteed rate of return over a fixed period of time. You can expect to find varying interest rates for CDs, depending on the duration until maturity. The longer you are willing to wait until maturity, the higher the interest rate you are likely to obtain. With a fixed deferred annuity, a guaranteed interest rate is provided for an initial period, usually one to five years. Afterwards the rates may be adjusted periodically to reflect market conditions (many annuities will also offer a minimum guaranteed rate after the initial period). And because you're dealing with a longer-term vehicle, rates for annuities are usually higher than with CDs.

Accessing money in a CD prior to its maturity date will cost you between 30 days to 6 months of interest. Of course, if you have several CDs with staggered maturity dates, you could avoid this penalty. With a fixed deferred annuity during the initial contract period you may only be able to access a portion of your balance without a surrender charge. Furthermore, if you are younger than age 59½, the withdrawals may be subject to a 10% IRS penalty.

The tax advantages of a fixed deferred annuity may make it the preferred investment for certain individuals. With CDs, earnings are taxable in the year the interest is earned, regardless of whether you withdraw the money. A fixed deferred annuity's greatest advantage may be that earnings accrue within the annuity tax-free until withdrawn. This allows your money to work harder for you.

If you are receiving Social Security benefits there is another aspect to consider. With a fixed deferred annuity, you can leave your interest earnings in the annuity, keeping your income below the level at which you would owe taxes on your Social Security benefits. As discussed earlier, CDs require you to take earnings as income in the year they are earned, thus increasing your taxable income and possibly forcing you to pay taxes on Social Security benefits.

Carefully consider your financial situation in relationship to the benefits of each investment vehicle. You may want to consider a mixture of CDs and fixed deferred annuities if you are looking to save for both short and long-term goals. If you want to discuss your options further, please contact our office so that we may tailor a portfolio to your specific needs.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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