CD (Certificate of Deposit) Replacement Annuities

Bank CDs have historically been considered to be some of the safest investments available. For retirees in particular, investments need to be wise to avoid losing money. Bank CDs, for example, are federally insured if the bank fails. However, Multi-Year Guaranteed Annuities (MYGAs) can be a great alternative to these investments. CDs and MYGAs both guarantee a contractual annual percentage for a specific period of time that you choose.  Both fully protect your principal from loss.  Both have no annual fees.  If you like CDs, it’s likely that you will also like this type of annuity. While you must pay taxes on interest earned each year with a CD for a non-IRA account, your interest is able to grow tax-deferred in an MYGA. Once you withdraw from an MYGA, however, the money can be taxed at normal income levels.

A concern for many is the protection offered by annuities in comparison to CDs. CDs are backed by the federal government, making them an extremely safe option. MYGAs, on the other hand, are backed by the paying ability of the carrier. What many don’t know is that MYGAs also have added protection from State Guarantee Funds, making these annuities very safe as well.

Multi-Year Guaranteed Annuities are also different from normal fixed annuities in that their rates are guaranteed for their entire contracted term. Some contracts allow for partial withdrawals each year exempt from tax penalties. This is in sharp contrast with CDs, which generally have large penalties for withdrawing money before their term is complete. This type of annuity also offers more competitive interest rates over time than a CD, with that interest being tax-deferred until distributions are taken, allowing for a greater return. 

While CDs have the potential to have better short term rates than these annuities, the annuity truly excels over 3 years, 5 years, or longer. Within an investment concept like a ‘Mixed Fixed Ladder,’ the use of both CD’s and MYGA’s could be recommended to enable you to have money maturing at different times. The contrast between CDs and MYGAs can be seen easily when looking at 3-year rates; for example, a current high-yield 3 year CD is currently paying approximately 1.1% while an MYGA is paying around 2.8%. 

Want to know more about this type of annuity? Feel free to call Elise at (208)918-0201 or email her at danielinsuranceidaho@gmail.com.

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