Nevada Annuities

How CD Annuities Work

CD Annuities

CD annuities are not actually a pure standard type of annuity. CD annuities are a mix of an annuity called a fixed annuity and a CD. The insurance company, in other words, combined the features of both products.

CD annuities act like a CD in that they guarantee a fixed rate for the entire duration of the contract’s terms. This type of contract has a shelf life usually from 1 to 10 years. The interest rates paid depend on the issuing insurance company, national interest rates, and the chosen contract term.

As you might suspect, there is a difference between CD annuities and the standard fixed annuity. The difference is the term of the guaranteed rate. A CD annuity’s rate is guaranteed for the full contract term while fixed annuities only guarantee the rate for part of the term.

Since the rate can be the same for both types of annuities, the consumer is wise to investigate which annuity best fits his or her portfolio. Depending on the particular financial objective, both annuity types may be right and provide the individual’s portfolio with the right mix of stable growth.

Of course other differences between CD annuities and CDs exist. CDs are issued by banks/brokers while CD annuities are issued by insurance companies. Since CDs are issued by banks this means CDs are insured by the FDIC.

CD Annuities are not FDIC insured. However the investor does have the safeguard of the reserves required by each individual state‘s department of insurance (DOI). The investor’s annuity is protected up to a certain amount by each DOI.

Taxes also comprise one of the differences. With CD annuities, the owner can roll over the annuity to another contract or company without triggering a tax-event. This is done with a device known as a 1035 exchange.

The IRS says the transfer money from one annuity to another does not showing an income in the year exchanged. No such exchange is possible with CDs. A CD generates income statements, hence income, every year.

Another key difference allows the owner to make partial withdrawals from CD Annuities. Unlike a CD, typical CD Annuities almost always allow you to withdrawal up to 10% of the initial investment annually. Not so with a CD. Liquidating even part of a CD requires you to cash out the whole thing and pay a surrender charge which could be sizeable depending on the size of the CD and bank.

CD annuities allow the owner to withdraw interest as monthly income. However, annuity owners who are not 59 ½ years old face a 10% IRS tax penalty for making an early withdrawal.

What type of annuity is best for you depends on your financial objective and goals and age. If you are retired or close to retirement, it probably makes very little difference which annuity type you select.

The best course of action may be just to go with whichever annuity offers the highest rate. You may also want to factor in which annuity will give you the highest monthly income once you annuitize, that is, begin taking a monthly income.

Regardless of the road you travel, both CD annuities and fixed annuities offer benefits not found in other investment products. Do your due diligence and you should have the product that best fits your needs.