In many ways, a single premium fixed annuity is very similar to an IRA CD. Both earn fixed rates of compounding interest, and the interest accumulates tax-deferred. Both are products for retirement savings, and there are tax penalties for early withdrawal. The primary differences are the issuers, who guarantees your money, and the sources of funds.
Fixed Annuity Basics
A fixed, deferred annuity is a savings product sold by life insurance companies. An annuity can be purchased with qualified money such as IRA funds or with non-qualified money. In either case, the interest earned accumulates tax-deferred. An annuity earns a fixed rate of interest for a period of years -- the rate and term are declared at the time of purchase -- and then interest as determined by the insurance company. Most fixed annuities have declining withdrawal fees for a period of years after they are purchased. Most contracts allow the annuity owner to withdraw up to 10 percent each year without penalty.
IRA CD Basics
An IRA CD is a bank certificate of deposit purchased for an individual retirement account. Many banks offer special CD products for IRAs. An IRA CD earns a fixed rate of interest for the term of the CD, which can range from a few months to five years. When the CD matures, the money can rolled over into a new CD or transferred to another IRA account. Interest in the CD grows tax-deferred because of the IRA nature of the money. All traditional IRA accounts have tax-deferred growth of earnings.
Safety and Guarantees
A bank IRA CD is insured by the Federal Deposit Insurance Corp. If the bank goes under, the FDIC will make sure CD holders get their money, up to the current amount of FDIC insurance. An annuity is backed by the insurance company that issued the contract. Insurance companies are regulated by state insurance authorities, which make sure companies maintain enough reserves to cover their obligations. Insurance companies also receive safety ratings from private agencies, so you can compare how safe insurance companies are.
Sources of Money
The tax-advantaged money in an IRA CD must come either from annual IRA contributions -- which are limited -- or from rolling over money from an employer's retirement account. IRA money can be accumulated only through government-approved retirement plans or accounts. An annuity can be used to turn any money in any amount into tax-deferred retirement savings. For someone who wants to save more for retirement than the IRA rules allow, an annuity provides a similar type of savings product. An annuity can also be purchased with qualified IRA money.
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