Nevada Annuities

CD Annuity

CD Annuity

If you haven’t heard of a CD annuity, this article will explain the details. In point of fact it is a hybrid of a fixed annuity and a CD. This type of annuity guarantees a fixed rate for the entire duration of the contract’s terms. The term can range from 1 to 10 years and at this point in time, the rates range from 3-10%. The length of the contract and the rates of the contract depend on the insurance company, national interest rates, and the chosen contract term.

Important Difference

There is an important difference between a CD-type and a fixed annuity. That difference is the term of the guaranteed rate. A CD annuity’s rate is guaranteed for the full contract term while fixed annuities, although offering the same guaranteed rate, only guarantee it for part of the term.

For example, if you had an 8 year, 7% fixed annuity, the guaranteed rate might only run for the first 5 years. On the other hand, an 8 year, 7% CD-type annuity would guarantee the rate for the full 8 years.

CD-Type Annuity and CDs Differences

As you can imagine, differences exist between a CD-type annuity and a CD. The first difference is that CDs are issued by banks/brokers while CD-type annuities are issued by insurance companies. CDs are insured by the FDIC up to $250,000 for non-retirement accounts. Annuities are not FDIC insured, but are safeguarded by individual state agency reserves.

The second difference, and it is a big difference, is CD-type annuities can be rolled over without triggering a tax-event. This means the CD-type annuity owner can transfer money from one annuity to another without showing an income. Therefore, no taxable event is triggered by the transfer.

This is not possible with CDs. CDs generate income statements every year and in most cases, the interest income is taxable.
Another difference is called the withdrawal feature. You can make partial withdrawals from a CD-type annuity. Unlike a CD, a typical CD-type annuity will allow you to withdraw up to 10% of the initial investment annually. In contrast, liquidating even part of a CD requires you to cash out the whole thing and pay a sizable surrender charge.

CD-type annuities also include the ability to withdraw interest as monthly income. If you do withdraw this interest, you could, and probably will, face a 10% IRS tax penalty. As a point of fact, all annuities are subject to a 10% tax penalty when liquidated prior to the age of 59 1/2. Hence, if you are 59 1/2, you probably won’t face the IRS penalty.

Investing in a CD, Fixed Annuity, or CD-type Annuity

If you are considering investing in one or more of the products, your age is probably the most important consideration. If you are retired or close to retirement age or near or over the age of 59 1/2, annuities will out-perform CDs because of their tax-deferral benefits and, in most cases, more competitive interest rates. A CD annuity makes sense for the person looking to get a better rate.