The “Plain Jane” vanilla ice cream in the annuity world is called a Fixed Rate Annuity…also known as MYGA (Multi Year Guarantee Annuity).
She’s really pretty boring….you agree to deposit money at an insurance company for a certain period of years, 2-10+ year contracts are all available.
In return, the insurance company agrees to keep your money safe and pay you a fixed rate of interest for that term. At the end of the term, you can take your money and do something else with it, or let it roll into a new period.
Sounds boring and really similar to a Bank CD.
But wait. If you compare her to a Bank CD, maybe she’s not boring at all. Here are a few reasons why:
- The interest grows tax deferred in an annuity until you withdraw it. But with a bank CD the interest is taxable every year.
- You can withdraw money from an annuity. Sometimes it’s just the interest and sometimes it’s up to a 10% withdrawal. However, with most Bank CD’s there’s usually very little liquidity at all. In fact, in most cases withdrawals have a penalty of 3 to 6 months worth of interest.
- Rates vary from time to time but right now most Bank CD’s are renewing at really awful rates.
*As of this writing (10-31-13) you can get a 5 year CD-like annuity paying 3.5% (click here for current rates).
Just do the math.
If you search outside your local bank and check www.bankrate.com/cd.aspx, the highest national 5 year Bank CD right now is at 2.0%. So on $100,000, you will earn $2,000 interest in a year that is all taxable, and you can’t withdraw any money without penalties.
Instead, let’s say you do the CD type annuity at 3.5%. That same $100,000 gets you $3,500 in interest (yes, you can earn $1,500 more for the year just sitting on your couch watching Judge Judy). Further, it grows tax deferred and if you want to take out the interest, you can, without any penalties.
Hmmmm….compared to Bank CDs, these CD type annuities actually sound kind of exciting.
* 3.5% Fixed for 5 years is available as of this writing (10-31-13). Rates change and be sure to check current rates before making any decisions.
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