Annuity

Annuities and CDs are affected by interest rates. When interest rates take a fall, CD returns tend to take fall too. Annuities have a minimum guarantee of 3% to 4% return of investment. What this means, no matter how low the interest rates fall you're guaranteed a minimum return. Once more, falling interest rates mean lower returns on CDs. To combat the problem of falling interest rates, Insurance companies have set provisions for minimum returns in their annuities. This is to insure your annuity doesn't fall bellow minimum performance even if CD rates do. Another, interest earned on annuities is tax deferred income.

On a CD you have to pay annual taxes on earned interest without having the opportunity to withdraw your money until you met the time period of the CD. Similar, annuities have set time period before you can withdraw your money, but the interest you earned is tax deferred. The only way you pay taxes is when the money is withdrawn. So in essence, your tax deferred interest remains part of your investment earning you more money through the term of your annuity. While a CD, you have to pay state and federal taxes every year. As you can see, annuities offered tax deferred interest, but also offered liquidity.

When you have a CD, you're not allowed to withdraw any money until you have met the term period of the CD. Annuities have terns built into the contract that allow you to withdraw 10% of your account value yearly. In addition, some contracts allow you to withdraw earned interest on a monthly basis. For example, some annuity contracts have terms allowing you access to your money in case you are hospitalized, life-threatening disease, permanent disability, or any other life-changing event that will affect you financially. Annuities can also be arranged to pay out a fixed amount in a 5 or 10-year interval, so as to spread your tax liability and provide a form of secure income. Finally, Annuities offer superior liquidity over CDs.

As you can see, Annuities and CDs are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial intuitions. However, there are immense differences between them. While Annuities offer everything CDs offer, annuities have immense advantages in higher returns, tax deferred interest and a flexible liquidity plan.