The biggest benefit of an annuity over a CD is that your taxes are deferred each year with an annuity, allowing your investment and your interest to grow over time. When you invest in a CD, you are required to pay taxes on your gains each year, whether you withdraw them or not.
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Another benefit of an annuity over a CD is that with an annuity you are guaranteed a certain amount of interest on your investment. The benefit here is that even if the investment goes south, you will still get your guaranteed return. The CD has no guarantee on the amount of interest earned, although there might be a max set into place.
This doesn’t, by any means, suggest that a CD is a bad investment. It can be a very good one, especially if you are looking for a short-term investment versus a long-term investment. You just need to understand the difference between the two to understand which one offers you the better choice for your situation.
What is a CD?
CD is an abbreviation for Certificate of Deposit. Interestingly, a CD is very similar to an annuity in terms of it being a low risk investment. However, you can invest in a CD with as little as $500. Banks are typically the choice of consumers to purchase CDs.
Investing in a CD is a bit like investing in a bank. Your funds are guaranteed by the FDIC up to $100K and you draw interest on your investment. While the interest will be lower than an investment in the perfect stock market pick, you will get a higher interest rate than you would with a savings account, and without the risk of the stock market.
CDs are a guaranteed investment. This is not a guarantee of gains but a guarantee against loss of principal, something the stock market doesn’t offer. If you invest $100K, for example, and the investments the bank chooses don’t do well, then you are still guaranteed to get your $100K returned at the end of your investment period.
When you invest in a CD you are making a one time investment only. If you want to invest more money after you have invested in a CD, then you are going to have to invest into another one.
There is no maximum amount of money placed on a CD investment. If, however, you want your investment to be federally insured, then you have to keep your investment at $100K or lower. You can purchase as many CDs as you want, whenever you want.
CDs offer you the option of making a short-term investment. You aren’t fined if you close out your CD early. Some banks, however, are offering higher initial interest rates if you sign a contract to keep your CD for a specified period of time.
Because you pay taxes on the gains from your CD annually, you will not have to pay taxes once you close out your CD.
How does a CD compare to an annuity?
As mentioned above, CDs and annuities are very similar. For example, there is no maximum dollar amount that you can invest in an annuity, jut like a CD. But, there are some major differences too.
First of all, an annuity is not FDIC guaranteed. This means that you need to choose a financially sound institution to purchase your annuity from. If the company you purchase your annuity from goes out of business, you lose your investment! This is something that you need to research carefully before you buy.
You can purchase an annuity from many different sources but the most common sources are insurance companies. Not every insurance company sells annuities, but most major ones do.
An annuity benefit can be paid in one lump sum or in payments over time. A CD doesn’t have that option; you have to take all your money at once. This makes an annuity an excellent choice for people who are looking for steady income either for the rest of their life or a pre-determined amount of time.
In addition, there is only one type of CD, limiting your options. There are several types of annuities from fixed deferred annuities to immediate single premium annuities. You can choose your annuity based on your long-term needs.
Many investors recommend purchasing a fixed deferred annuity when you are young and when you turn 59 and 1/2 taking the lump sum from that annuity and placing it into an immediate single premium annuity that pays you back on your investment for the rest of your life. This is a sure fire way to guarantee your income.
Which should you choose; annuity or CD?
Only you can answer this question. If, however, you are looking for a long-term guaranteed investment, then an annuity should be your first choice. If you want to make a small investment that you can access at any time, then a CD should be your first choice. There are many benefits to choosing an annuity over a CD, you just need to decide how much money you want to save and when you are going to need it.
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