CD Annuities Options

Do you have a bank or brokerage CD that is about to mature and would like an investment that offers competitive rates but with more flexibility? A CD annuity could be just right for you (Note that FDIC insurance applies to CDs but not to annuities which are guaranteed by the issuing company). (Note: With tax deferred investments, income taxes may be due upon withdrawal of funds, and withdrawals prior to age 59½ are subject to a 10% penalty. Earnings withdrawn from an annuity are taxed as ordinary income, annuities may have surrender charges or expenses Just as with any other annuity, your investment in a CD annuity grows tax-deferred.)

The income from a CD annuity is not taxable until you decide to remove the interest earned. So if you don’t need to withdraw the income each year, the earnings can continue to accumulate. Whereas with your bank CD, the interest is taxable in the year it’s credited to your account, whether you take it out or not.

Rates on CD annuities are guaranteed for terms ranging from 1 to 10 years. When your annuity matures, you can take the money and pay income tax on the interest or renew the contract and preserve the tax deferral. And if you don’t like the renewal rates offered by the annuity company, you can roll the annuity tax-free into another firm’s product. Generally you can continue deferring the income tax until age 85. At that time you usually must begin taking payouts based on your life expectancy.

You are allowed to remove some of the CD annuity’s principal before it matures. But if you make withdrawals beyond policy limits, you might have to pay a surrender charge. Or you could see a reduction in the interest rate on the remaining balance for the rest of the annuity’s term. A better alternative might be to annuitize the contract and avoid extra charges. However, there are some companies that waive withdraw penalties if you need the money for hospital or nursing home bills.

Another consideration is what will happen if you die before the CD annuity term ends.If you name your spouse as the beneficiary, he or she would be able to take out the principal and interest in a lump sum, or annuitize it for a series of payments, or keep the money in the account until it matures. Beneficiaries other than your spouse typically must withdraw the money within five years of your death or over their life expectancies if payments start within a year of your death.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.