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Finding an answer to the CD interest crisis fixed annuity vs. CD’s

Henry Monahan

A co-worker once told me the CD didn’t stand for certificate of deposit anymore, it stood for certificate of disappointment. For the past 7 years, the United States has been in a historically low interest rate environment. For many retirees, who are accustomed to supplementing their income with their certificate of deposit interest, the lower interest rates made it necessary to look elsewhere for safe income while protecting principal.

As of April 22, 2016, the most competitive 5-year CD rates were around 2.1% to 2.2%.  Currently, the highest 5-year fixed annuities are paying 3.1%.  While this doesn’t seem like much, the difference adds up to a 47% increase over the 2.1% rate that is offered by CDs (3.1/2.1= 47%).

Additionally, fixed indexed annuity interest can remain in the annuity instead of being paid out to the contract holder, which allows for the deferral of income taxes. This isn’t the case with a CD.

Let’s say an investor didn’t need the interest from their CD. As a result, the CD remained untouched and continued to earn interest. However, they would still pay income tax on the CD, regardless of whether or not it was distributed.

Alternatively, the interest in a fixed annuity is only taxable if the investor decides to receive the pay out. Otherwise, the interest remains in the annuity and is taxed at a later time.

Now, take a moment to consider the impact of letting a 2.1% CD grow vs. allowing the same amount to grow in the fixed annuity:

Year 5-Year CD 5-Year Fixed Annuity
0 $1,000,000.00 $1,000,000.00
1 $1,015,750.00 $1,031,000.00
2 $1,031,748.06 $1,062,961.00
3 $1,047,998.09 $1,095,912.79
4 $1,064,504.06 $1,129,886.09
5  $1,081,270.00 $1,164,912.56

Due to the tax deferral and fixed indexed annuity’s higher interest rate, the account value is substantially different after 5 years. Considering these statistics, a fixed indexed annuity might be appropriate for retirees looking for an alternative to certificates of disappointment.



About the Author:

As Vice President of Paramount Financial Advisors, Henry Monahan combines a comprehensive understanding of sophisticated and proven retirement strategies with a deep passion for helping families achieve their retirement goals. Whether it’s creating a lifetime income stream, providing a legacy, or just some added peace of mind, the Paramount Team focuses on what is important to you.

If you would like to learn more about Paramount Financial Advisors, visit our website, or reach out to Henry at

Investment Advisory Representative of Retirement Wealth Advisors Inc. (RWA), 89 Ionia NW, Suite 600, Grand Rapids, MI 49503 (800) 903-2562. Investment Advisory Services are offered through RWA. Paramount Financial Advisors and RWA are not affiliated.


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