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CD Alternatives

Are there other alternatives to Certificates of Deposits (CDs)?

Many people who own bank certificate of deposits (CDs) own them because they feel that CDs provide an element of safety and security in a volatile world. Unfortunately, these same investors are currently experiencing very low rates and are seeking alternatives. Some cynics have named low-yielding CDs "Certificates of Depreciation" because of their inability to keep up with the rate of inflation. Still others own CDs because are usually insured by the FDIC (certain limits apply). You can visit www.fdic.gov to determine if all or part of your CD is insured.
You can also visit this site to view some current CD rates.www.money-rates.com/cdrates.htm

But, the good news is other alternatives do exist. Let's just examine one of the popular, yet sometimes misunderstood alternative, a fixed-annuity.

You might be aware that there are three basic types of fixed annuities: the immediate, fixed annuity, the deferred, fixed annuity, and the equity-indexed annuity. Each has it own advantages and disadvantages. A Certificate of Annuity is becoming a popular alternative to a Certificate of Deposit because it provides six potential benefits to owners:

  1. Security of Principal*
  2. Tax-Deferral
  3. Liquidity
  4. Probate Avoidance**
  5. Guaranteed Lifetime Income*
  6. No Upfront Sales Charges.

    * Based on the claims paying ability of the issuing insurance carrier.
    ** With properly named beneficiary.

Let's take a look at a side-by-side comparison of the features of a deferred-fixed annuity and a certificate of deposit.

Features
Fixed Annuity
CD

1. Free from principal/market risk and price fluctuations?
Y
Y
2. Backed up by an insurance organization. *
Y
Y
3. Are (interest) earnings reinvested automatically with no current income taxation?
Y
N
4. Tax liability on Social Security income eliminated on deferred accumulation?
Y
N
5. Liquid?
Y
Y
6. Flexible?
Y
Y
7. Partial penalty-free withdrawal?
Y
N
8. Funds not reduced by commissions?
Y
Y
9. Does this investment automatically avoid the expense and delay of probate?*
Y
N
10. Guaranteed lifetime income with tax advantages?
Y
N
Totals
10
5

*A CD is backed by the claim paying ability of the Federal Deposit Insurance Corporation (FDIC) while an annuity is backed by the claims paying abilities of the issuing insurance company. ** With properly named beneficiary.

Before making the decision to put your hard-earned money into anything, whether a Certificate of Deposit, or a Certificate of Annuity (or BOTH) it is important to take a look at your specific situation. You must determine whether you want to invest for the long-term, or whether you need access to the funds in the not-too-distant future. Just as it may be imprudent to put all of your money into a CD, it may be just as imprudent to put ALL of your money into an annuity.

For example, an annuity might be appropriate if your investment goal involves accumulating money for retirement or if you are over sixty years old. A CD or money-market account could be an appropriate holding vehicle if you want to set aside money for a short-term objective, like buying a house or a car.

An important benefit of an annuity is its ability to grow tax-deferred. Some experts call this a triple compounding effect:

  1. Your money can earn interest on your premium;
  2. Your money will earn interest on the interest;
  3. Your money will earn interest on what you would normally pay on income taxes.


Obviously, when you withdraw your money, the government requires you to pay taxes on the growth of your money and only the growth (not the original premium) if it is non-qualified money.

To illustrate the power that tax-deferred growth can have on your portfolio, let's examine the following scenario illustrated in the chart below.

The following scenario assumes an issue age of 35, an initial investment or premium of $100,000, and a tax rate of 33%. Although annuities normally can be expected to earn more than CDs, for the sake of showing the effects of tax-deferral, we will also assume that the CD and the annuity each earn 5%.

AGE
APPROXIMATEAFTER-TAX VALUE OF A CD*
APPROXIMATE TAX DEFERRED VALUE OF A FIXED ANNUITY**
APPROXIMATEAFTER-TAX VALUEOF A FIXED ANNUITY**
45
$139,030
$164,390
$143,140
55
$193,290
$267,870
$212,470
65
$268,700
$436,280
$325,300
75
$373,600
$710,690
$609,160
85
$519,400
$1,157,690
$808,650

*These are approximate values for illustration purposes only.
**C.D. values assume that federal tax is deducted each year. Annuity values assume that a total withdrawal is made at the age shown, and federal taxes are paid at that time.
(Under current tax law interest earned on an annuity is not taxed until withdrawn. Total or partial surrenders of the annuity before age 59 1/2 may incur a 10% tax penalty.)

QUESTIONS YOU SHOULD ASK YOURSELF

  • Are you tired of low CD rates?
  • Would you like to IMPROVE your returns, and at the same time REDUCE your taxes?
  • When you die would you like your family not the IRS to be your primary beneficiary?
  • Would you like a retirement income that you cannot outlive?
  • Would you like to earn long-term, stock-market-linked gains with low risk to your principal?
  • Would you like to pay less tax on your Social Security Income or your current income?
  • Would you like to discuss Other Alternatives to CDs before you renew at a low rate?

If you found this information useful,
answered "YES" to any of the above questions, or
would like to discuss your situation and alternatives,
you can contact us by clicking on the button below.

NOTE: lubbers & associates, llc does not give tax or legal advice. The comments regarding tax treatment on this website simply reflect our understanding of current interpretations of tax laws as they apply to annuities. Since tax laws are always changing and are subject to interpretation, we highly recommend that you seek the counsel of your attorney, accountant, or other qualified tax advisor regarding annuity taxation as it applies to your particular situation.