Some people don’t like a lot of risk. They want an annuity that guarantees them money, same as if they purchased a CD.
That type of annuity structure is called either a Multi Year Guarantee Annuity (MYGA) or a Fixed Rate Annuity.
With this type of annuity there is a contractual guarantee within the policy for a certain period of time.
An example of this would be that you can buy a 5 year CD (Certificate of Deposit) that has a guaranteed yield of 2.5% for each of the 5 years. As a comparison, you can buy a 5 year fixed rate annuity that has a guaranteed yield of 3% for each of the 5 years.
Keep in mind though that there are some specific similarities and differences between CDs and Fixed Rate annuities that you need to familiarize yourself with in order to make the right decision for your situation.
Similarities Between CDs & Fixed Rate Annuities
CDs and Fixed Rate Annuities both offer a guaranteed fixed rate for a certain period of time. CDs can offer very short terms like less than a year as well as longer term lock ins as well. The shortest term Fixed Rate Annuity in most cases is 2 years, with these fixed rate annuities being offered with guarantees as long as 10 years or more. Neither CDs or Fixed Rate Annuities charge internal fees. Both have surrender charges if you take all of your money out of the contract before the specified term ends. If you hold a CD or Fixed Rate Annuity to the full term of the contract no surrender fees are charged to get your money out in full.
Differences Between CDs & Fixed Rate Annuities
The primary difference between CDs and Fixed Rate Annuities is that interest earned on a CD is taxable annually. With Fixed Rate Annuities, interest earned compounds tax deferred and is only taxed when you take money out. At that time, the taxation on a Fixed Rate Annuity is under the accounting rule of last in first out, meaning gains are taxed first at ordinary income levels.
In addition, CDs are insured by FDIC whereas Fixed Rate Annuities are backed by state guaranteed funds.
If your time frame is 2 years or less, you most likely will want to invest in a CD or Money Market for a guaranteed fixed rate. If your time frame is longer than 2 years, then a Fixed Rate Annuity may be the better option for you.
If you need a fixed rate, but want to defer taxes, then a Fixed Rate Annuity is your only choice for that specific solution.
Many people find that a combination of CDs and Fixed Rate Annuities both work well in the fixed rate portfolio, and complement each other when allocated properly.
Next time you are looking for a pure fixed rate, consider both CDs and Fixed Rate Annuities as simple and efficient, safe money solutions for you and your family.
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