Comparing Fixed Annuities Versus Bank Cd's

By Author: JonathanTyler
Total Articles: 8
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For people that are ultra conservative and only want their funds in a bank CD, reconsider that situation and look into fixed annuities. Fixed annuity rates increase and decrease with market conditions, just like CD rates. However, there are differences between fixed annuities and CDs that may make the annuity a more valuable asset in specific situation.

Before delving into those differences, you should be aware that fixed annuities aren't for everyone. The person that has several years before reaching the age of 59 ½ should not consider putting all assets in a fixed annuity. If you remove the funds before the age of 59 ½, there's a 10 percent penalty on the growth. However, if they want tax-deferred growth or a higher rate of return on their IRA funds, a fixed annuity may be a very appropriate investment vehicle also.

How is a fixed annuity better than a CD? First, both fixed annuities and CDs have a penalty period. In annuities, the period is a surrender period and you receive a surrender charge. In bank CDs, the time charge is a penalty for ...
... early withdrawal. While the two are similar, there's a huge difference. When the term on a CD ends, the bank sends you a statement letting you know. Some people don't respond, either because they're busy, they forget, they're ill or simply out of the area. The CD then rolls over to another CD of the same term. Many CD shoppers notice that the specials are odd numbers of months, such as 56 months instead of 60 months. That's because if the CD rolls over automatically to another 56 months, the rate isn't as high as a standard number of months, such as 60 months, 5 years.

If you find that your CD rolled to a much lower non-standard term, you'll also notice that the interest is well below what the market conditions suggest. In order to remove it, and invest it at a higher rate, you have to face a new early withdrawal penalty.

There is no rollover for fixed annuities. While the interest rate changes according to market conditions, once the policy ends the surrender period, the company doesn't set a new surrender period. This means it's free from the worry of having your money stuck in a low interest bearing account. Any time you want, after the surrender period ends, the company allows you to withdraw funds.

Another important feature of a fixed annuity that makes it a superior investment over bank CDs is the tax-deferred interest. If you simply want to allow the funds to grow and pass to heirs, with the option of invading them if you need to do that, fixed annuities allow the money to build faster and grow tax-deferred.

Tax-deferral is important if you're a senior. You don't have to be in the 33 percent bracket to reap rewards. If your income borders on the limit where you might have to begin to pay taxes on the second half of your social security, tax-deferred growth saves thousands of dollars each year.

No matter what your situation, it pays to diversify your investments. If you simply cant' tolerate the fluctuations of the stock market and find that type of diversification unsuitable for you, consider at least, diversifying within fixed products. A fixed annuity is one way to do that.