Investing in CD Annuities

CD annuities are also known as fixed rate annuities. These plans have many features in common with bank Certificates of Deposit (CD). They offer a guaranteed fixed interest rate, which has been established for a certain number of years. CD annuities also offer security for the investment principal and certain tax advantages. For investors who value safety in a retirement plan, CD annuities offer many benefits.
Advantages of CD Annuities

While other types of fixed annuity plans offer a fixed interest rate, most do so only for the first year of the annuity period. The interest rate may be adjusted every year after the guarantee has expired. CD annuities provide investors with a fixed interest rate for the entire duration of the plan. CD annuities were designed to address investors' concerns about the safety of their retirement income.

CD annuities may also be called "multi-year annuities." When first purchasing the CD, investors can choose the contract duration, which usually lasts between three and ten years. At the end of this period, investors may withdraw all or part of their funds, or they can renew the CD annuity for another specified time period. Withdrawal charges expire at the end of the term, and the interest rate stated at the beginning of the contract remains the same throughout the life of the contract. Investors will also know what to expect.

CD annuities are not subject to income tax on earnings as long as the monies stay in the account, just like traditional annuities. There is no Form 1099 to file with the Internal Revenue Service. Investors also have the option of naming a beneficiary for the funds remaining if they die during the time the CD contract is in force. Heirs receive the value of the account without going through probate, and they can choose between taking a lump sum payout or a series of payments.
Is a CD Annuity Right for You?

Only your financial adviser can really determine if buying a CD annuity is the appropriate retirement strategy for your circumstances, but in general, these investments are appropriate if you are concerned about the security of your retirement income, feel comfortable with the CD concept, and want to leave a relatively worry-free inheritance to your heirs.

CD annuities often offer better rates and more tax benefits than bank CDs, but they can be more difficult to get out of due to penalties imposed by the Internal Revenue Service, and CD annuities are not under the protection of the Federal Deposit Insurance Corporation. Additionally, if interest rates happen to rise during the CD contract period, you may be locked in to a lower interest rate than you would have enjoyed in another type of investment. On the other hand, bank CDs do not usually have tax-deferral status, while CD annuities are considered tax-deferred investments.

For more information from Steven on how to invest in annuities and common investment mistakes, visit his Immediate Annuity Guide. To learn more about securing your retirement with life annuities, visit the Life Annuity Guide.