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CD vs Deferred Fixed Annuity: Identifying the Difference

Are you thinking of securing your future through an investment? The CD and the Deferred Fixed Annuity are two of the some of the most popular forms of investments today – but they different.

Choosing between the CD and the Deferred Fixed Annuity is like choosing between two diverging roads that would determine how your life would turn out. Each path leads to a different future.  Because we want what is best for our loved ones, and ourselves we should take into consideration many factors to make sure that the path we choose will lead us to a brighter tomorrow.

The Certificate of Deposit

The CD, or the Certificate of Deposit, is a saving tool generally offered by banks that guarantees fixed interest rate for a period. The CD is backed up by the U.S. government through the Federal Deposit Insurance Corporation (FDIC). If the bank fails to satisfy the agreements and conditions specified in the contract, the FDIC gives an insurance of up to $100,000 per depositor.

The Deferred Fixed Annuity

The Deferred Fixed Annuity is a type of deferred annuity, which offers a fixed rate of interest that may be guaranteed for a specific period. This annuity is a tax-deferred investment that is generally offered by insurance companies.  Deferred fixed annuities are backed by the financial strength of the insurance company. They are not insured by the U.S. government.

The Differences

The CD and the Deferred Fixed Annuity have different features. The path of investment that you will choose should be based upon your financial situation and objectives.

Short Term Gain

If you want to save money for a short term and specific goal, like saving for a down payment of a new car or a house and lot, the CD might be a better option.  In the CD, you can choose among different a variety of maturity periods that range from as long as several years to as short as one month.

Long Term Gain

On the other hand, if want to save money for a long-term goal, like preparing for your retirement, the deferred fixed annuity may be a considerably good option for you. In most cases, deferred annuities result in better growth of account value than CDs. Because fixed annuities are designed for retirement purposes, they are often referred to as “retirement annuities.”

Rate of Return

CDs provide an assured rate of return over the time of the contract, with lower returns for short-term periods of deposits and higher returns for longer periods. However, interest rates vary depending on what is happening in the economy, and there are no guaranteed interest rates if you choose to renew your Certificate of Deposit.

On the other hand, deferred fixed annuities provide you with a guaranteed rate of return that is locked in for an initial period. Moreover, all types of annuities guarantee a fixed minimum interest rate so you do not have to worry about sudden market downturns. No matter what happens to the economy, the interest rate of return you receive will never fall below the rate of return specified in your annuity contract because it is fixed.

Tax Savings

If you are looking for an investment that would save you from heavy tax, the deferred fixed annuity is more appropriate for you.

In CDs, earnings are subject to tax in the year that the interest is accumulated, even if you do not withdraw any amount from your account. On the other hand, tax deferral is one of the chief features of fixed annuities. The annuity contract can only be charged with tax when the annuity owner withdraws money from his/her account. Thus, you are in control of when to pay your taxes.

Deferred fixed annuities are not considered as taxable income. Therefore, you can reduce the taxes on your Social Security benefits by saving your taxable income into your annuity. When invested in the annuity, the once taxable income becomes non-taxable.

Withdrawal Options

When a CD reaches its maturity date, you have the option to take the money out in one lump sum, or you may renew the Certificate of Deposit for another period.

You may also opt to take your money out in a lump sum with a deferred fixed annuity. You can also choose a lifetime income structure that may guarantee you a fixed monthly income for as long as you live. Aside from these, you can also let your money accumulate and withdraw it when the need arises.