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Annuity vs. CD
Assume an individual has $100,000 to invest and is considering an annuity or a CD. He or she is a 40% (combined state and federal) taxpayer. The following shows how tax deferral gives the annuity a significant advantage over the CD.*

  Certificate of Deposit Annuity
Before-tax yield:6.50%6.50%
After-tax yield:3.90%6.50%
1 year$103,900$106,500
5 years$121,081$137,009
10 years$146,607$187,714
15 years$177,514$257,184
20 years$214,937$352,365

*Both investments assume the same rate of return over 20 years and annual compounding. After 20 years, the annuity value after taxes is $251,419.

Differentiating Annuities and CD’s
In the past, many comparisons have been made between certificates of deposit (CDs) and annuities. Some of these comparisons are fair and accurate; some are not. Let’s try to set the record straight.

A CD is a time deposit insured by the FDIC guarantee that protects such bank assets with a limit of $1 million. Certificates of deposit should be viewed as short-term investments in that their yields are based on short-term assets. While maturities typically extend out to 5 years, most CD customers elect one-year or three-year time horizons. The earnings on CDs are taxable unless the product is held in a qualified account. Finally, CDs carry a loss-of-interest penalty that extends for the full term of the contract if it is cashed in before it matures.

An annuity is not a short-term investment. It rewards the buyer who commits to tax deferral and that reward is more dramatic every year. The annuity is not guaranteed by the FDIC, but there is no limit in terms of protection by the insurance company. The annuity has a finite period during which surrender charges apply. Unlike CDs, annuity monies are invested by the insurer for 6 to 10 years, depending on the terms of the contract. The annuity offers liquidity in addition to tax deferral through free withdrawals, loans and surrender charge waivers under certain circumstances. Finally, whereas the value of a CD could be part of the owner’s estate at death, the annuity passes outside of probate to the named beneficiary (assuming the beneficiary is an individual, not the estate).

Last Updated: 9/23/2012 10:05:00 PM