With a fixed-rate annuity you can earn up to 2.40% for a three-year guarantee period and up to 3.05% annually for a five-year contract, according to AnnuityAdvantage's large database of annuity rates.
With bank CDs, the best you can do (as of 11/06/2020) is a mere 0.80% for a one-year CD, 0.85% for a three-year CD, and 1.00% for a five-year certificate, according to Bankrate.com.
Like a CD, a fixed annuity-also known as a multi-year guarantee annuity or a CD-type annuity-- pays a guaranteed interest rate for a set period, usually three to 10 years. All of your money goes to work for you immediately.
Though not FDIC-insured, fixed annuities are covered by state guaranty associations, up to certain limits, that vary by state. The odds that you'll ever need to rely on the guaranty association are very small. Annuities are issued and guaranteed by life insurance companies, which are strictly regulated by the states.
More reasons why fixed-rate annuities beat CDs, according to Ken Nuss of AnnuityAdvantage:
Tax-deferral. All CD interest is subject to federal and state income tax annually unless the CD is in an IRA. A fixed annuity is tax-deferred. At the end of the annuity's initial guarantee period, you may renew it for another term or roll it over into another annuity.
For certain retirees, lower taxes on Social Security benefits. About 40 percent of retirees who receive Social Security pay taxes on at least a portion of their benefits. By moving some of your money from a CD into an annuity, you'll reduce income that may trigger the tax on Social Security benefits.
Greater unpenalized liquidity. Banks impose substantial penalties on all early withdrawals from CDs. Most fixed-rate annuities let you withdraw interest or up to 10 percent of the value annually without penalty.
Continuing tax deferral and flexibility. Once the fixed term is up, you may renew or can roll over the proceeds into a new annuity of any type and continue to postpone taxes. When you get closer to retirement, you may decide to annuitize the contract. If you convert the fixed annuity into an income annuity, you'll get a guaranteed lifetime monthly income that begins either immediately or at a future date, you select.
One disadvantage. If you withdraw money from your annuity before age 59½, you'll owe the IRS a 10% penalty on the interest earnings you've withdrawn, plus regular income tax on it, as you would at any age. If you're sure you won't need the money in the annuity before that age, you're good to go. If not, it might be wiser to delay purchasing one until you're older, Nuss says.
This caution doesn't apply to an annuity in an IRA since you normally won't take money out of an IRA until you're past 59½ anyway. Though tax deferral is moot in a retirement plan, a fixed annuity is still a top choice for an IRA because it earns an attractive rate of interest.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. Ken writes on retirement income and annuities regularly for the Kiplinger website, Newsmax, and Physician's Money Digest.
