It can always be a bit challenging trying to decide which is the best way to invest your money for retirement. You understand the importance of diversifying your portfolio and reducing your exposure to risk. But which investment will get you the highest return possible from your nest egg?
The Fixed Deferred Annuity and Certificate of Deposit (CD) are two of the most popular and conservative investment options, which usually tend to be compared to one another because of their similarities. However, there are some major differences between these two investment options that can affect the amount of money you can earn. Take a look at the differences below.
|Fixed Deferred Annuity
|Investment Consideration: Taxation
|Not taxed until money is withdrawn. You benefit from the advantages of compounding interest by:
|Taxed in the year the interest is earned, even if you don't withdraw any money
|Investment Consideration: Guaranteed principal1
|Your full principal amount is guaranteed, and subject to claims-paying ability of insurance company
|Limited guarantee - FDIC insurance up to $250,000
|Investment Consideration: Is Money free of market risk and price fluctuation?
|Yes – fixed rates; interest rates credited have the potential to change over time, but are guaranteed not to be less than the guaranteed minimum interest rate stated in the contract
|Yes – fixed rate; rate does not have potential to change
|Investment Consideration: Is Interest free from current taxes?
|Yes – not taxed until money is withdrawn
|No – interest is taxed each year
|Investment Consideration: Guaranteed minimum interest rate
|Insurance company sets a minimum rate that can never go below that.
|Interest rates will vary depending on current market conditions and the length of time to maturity
|Investment Consideration: Probate Avoidance?
|Yes – the Annuity is passed directly to named beneficiary
|No – goes through probate
|Investment Consideration: Ability to make cash withdrawals without penalty?
|Generally able to withdraw a portion of account value, usually 10% a year, without a surrender charge2
|If you withdraw money prior to the maturity date, you may pay an interest penalty
|Investment Consideration: Guaranteed lifetime income with additional tax benefits?
|Investment Consideration: Capable of stretching to a beneficiary?
- Guarantees dependent upon the claims-paying ability of the company.
- Values withdrawn prior to age 591⁄2 may be subject to a 10% IRS penalty tax