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// CD-type Annuities

Buy CD-type annuities

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What are CD-type annuities?

CD-type annuities are a variety of fixed annuity which resemble bank CD's (certificates of deposit): they accumulate interest at a fixed rate for a fixed period of time.

CD-type annuities differ from ordinary annuities in that their accumulation phase is specified and fixed. With ordinary annuities, the accumulation phase may be prolonged indefinitely.

After the accumulation phase, CD-type annuities pay you a pension.

How they are superior to bank CD's

Taxes are deferred on interest from CD-type annuities. (Taxes can be deferred on interest on bank CD's, if they are in a tax-deferred account. This is the exception, however, not the rule.) What this means is that your annuity retains all of its interest until it pays out, all the while, it generates compound interest on the money that will eventually go to the government. Let's look at an example:

Suppose you buy a CD-type annuity and a CD, putting $1000 into each for a term of 5 years, after which you cash in each one for a lump sum. Let's assume an interest rate of 6% on each and a tax rate of 20% each year.

  annuity CD

0 years

 $1000.00 $1000.00
1 year $1060.00 $1048.00
2 years $1123.60 $1098.30
3 years $1191.02 $1151.02
4 years $1262.48 $1206.27
5 years $1270.58 $1264.17

What you see here is that the annuity loses money to taxes all at once after 5 years, whereas the CD loses money every year. Because the annuity doesn't lose money until the end, it generates more total interest.

Another difference is that, unlike bank CD's, annuities can annuitize (i.e. create a stream of payments) instead of endowing the owner with a lump sum of cash. Taking payment as a pension enables you to further defer a measure of your taxes.

How they are inferior to bank CD's

Bank CD's are insured by the FDIC, but CD-type annuities are not. However CD-type annuities may be insured in your state by the insurance regulatory commission.

Early withdrawal

As with bank CD's, your money is not exactly locked up if you put it into a CD-type annuity. You can withdraw it before the payout phase, but penalties will apply, as they would with bank CD's.

Why CD-type annuities?

CD-type annuities are a bit safer for investors because of their tighter guarantees. Some buyers will not notice that ordinary fixed annuities will not guarantee a fixed interest rate indefinitely, so an ordinary fixed annuity may not satisfy their financial plans. With CD-type annuities, the interest rate is guaranteed for as long as the annuity exists.

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