How does an annuity differ from a Bank CD? header image

How does an annuity differ from a Bank CD?

You’ve been thinking more and more about your financial future and you know it’s a good idea to save money now. So, where should you start? First, it’s important to think about your goals and timeline, what’s important to you and your comfort level for risk. If you’re looking for ways to save your money, earn interest and reduce your risk for loss then you may be considering an annuity or a bank certificate of deposit (CD). Both offer you the ability to save while earning a guaranteed interest rate, but they also have their differences. Here are some things to consider when deciding between the two.


One of the main differences between bank CDs and annuities is how you’ll be taxed on earnings. Interest earned from a CD is considered taxable income. With annuities you can accumulate earnings on a tax-deferred basis, which means you won’t pay income tax on your earnings until your money is withdrawn. This typically happens at retirement, when your tax bracket may be lower. This can allow the value of your annuity to grow more quickly than a taxable investment earning the same return.


Whether you choose an annuity or a CD, you’ll generally have access to your money. However, if you access your funds in a CD before it has reached its maturity date, you may be subject to an interest penalty. With an annuity, you may pay surrender charges if withdrawals are taken during the first few years, but once the surrender period has ended you’ll typically have access to your money at any time without paying surrender penalties. But, if you make withdrawals from an annuity prior to age 59 ½ you could be subject to a 10% penalty tax. 


When it comes to receiving income, you have multiple options for how you receive your annuity income stream. You can receive payments monthly, quarterly, annually, etc. – whatever is best for your situation. You can also decide on how you want to structure your annuity income stream. Do you want to receive the income for a certain number of years, in a certain dollar amount or as long as either you or your spouse is alive? In contrast to an annuity, a CD cannot provide you with a guaranteed lifetime income stream. Once a CD reaches its maturity date, you can either take the lump-sum value in cash or renew the CD.


An important part to consider when making the decision between an annuity and a bank CD, is what your timeline is for investing. Annuities are designed for helping you accumulate money for retirement or act as a distribution vehicle for your money. Our AccumuLock Indexed Annuity provides a paycheck for life when you activate the rider. If you’re considering a shorter timeline, Bank CDs may provide additional options for shorter maturity periods of time.


The good news is, both annuities and bank CDs provide guaranteed interest rates. However, an annuity may provide more potential for growth. For instance, the growth on the AccumuLock Indexed Annuity is tied to the S&P 500® index, which means that the interest credited to your annuity is determined by a formula tied to changes in the index. When you lock in an interest rate on a CD it is guaranteed for a specific period of time, but there is no guaranteed minimum for renewal rates.


If you pass before your annuity payout begins, your beneficiaries will receive the accumulated value of the annuity. Death proceeds will be paid directly to your beneficiaries, allowing fewer costs or delays associated with probate. Funds received may be subject to income tax. However, a CD may be subject to probate.

Preparing for your Financial Future

Individual investments are often just one component of a strong retirement strategy. And, the steps you take now can make a big difference when it comes to your retirement. Your local Farm Bureau agent can help you work toward securing your financial future and help you look for ways to ensure you’ll have the income you’ll need throughout your retirement years.

Bank CDs are FDIC insured, the other products referenced here are not federally insured.

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