CDs Rollover to Annuity

CDs Rollover To Annuity — Is It Really Good For options?​

 
CERTIFICATES OF DEPOSIT are safe but stingy, paying only 2.5 percent or so even if you're willing to tie your money up for five years. But some financial advisors suggest an alternative for investors willing to lock money up: a short-term fixed annuity.

"Fixed annuities generally offer 35 percent higher rates than CD rates in all economic eras," says Samuel Rad, an instructor at UCLA and a planner at Affluencer Financial in Los Angeles.

Currently, investors can find five-year annuities paying about 3.25 percent a year, beating the five-year CDs substantially, says Eric Heckman, a planner in San Jose, California.
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Annuities, as many investors know, are somewhat controversial insurance products generally meant for retirement. In exchange for an up-front premium, you get a steady income, fixed or based on investment returns. While there's no tax deduction on money put into an annuity, investment gains are tax deferred until they are withdrawn, with all payouts taxed as income as with an individual retirement account or 401(k).
Many investors are familiar with immediate annuities, which pay monthly income for life as soon as they are purchased. Deferred annuities also pay for life but don't start paying for a set number of years – and are more generous because of the delay. But unless you add expensive bells and whistles, money in an annuity is locked up for the long term and cannot be taken back as a lump sum. Payouts seem generous because each includes a bit of your original principal. If you die before payments equal your original purchase price, the difference is lost and not there for your heirs.
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One option is the "term certain" annuity that pays for a given period and then stops. Another approach is a deferred annuity that starts payouts after five years.

 
 

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What You Need to Know About Rollover CDs
 
"A five-year deferred annuity will pay a guaranteed rate of return for the duration of the contract," says Brian Saranovitz, co-founder of Your Retirement Advisor, an advice website. "The credited rate is typically higher than a CD of the same duration."

Because these products are designed for retirement, a five-year play is really best for people in their mid-50s or older.
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"Any withdrawals of gains from a non-qualified annuity will be subject to tax at ordinary income tax rates and prior to age 59.5 will be subject to a 10 percent surtax," Saranovitz says. "After age 59.5, all gains will be taxed at ordinary income tax rates, but the 10 percent surtax is eliminated. For these reasons, it's imperative for individuals looking for liquidity to understand the tax implications."


What is better choice CD or Annuity?
If you're thinking it's time to start stashing some money away for a rainy day or a sunny retirement, two available investment options are certificates of deposit (CDs) or annuities. In both cases, you'll get a better interest rate than a regular bank savings account or even that jumbo pickle jar you hide under the porch. Unlike savings accounts, however, you won't be able to drop by the ATM six times a day, as these instruments include substantial penalties for premature withdrawal.

The Right Choice
Whether you choose to invest in an annuity or CD has a lot to do with how quickly you need the money. If you're saving to buy a home, a CD may be the better choice, while annuities are better for long-term goals like retirement. If taxes are an issue for you, you might want to select the annuity to take advantage of the tax deferral feature.​






 

​Identification
Annuities are typically sold by life insurance companies. They allow you to invest a regular monthly amount which earns interest on a tax-deferred basis. At the end of the period, the insurance company makes regular monthly payments to you, with the amount based on your age and the accumulated annuity value. CDs are sold by banks. You provide the bank with a specific amount of money in exchange for a fixed interest rate. At the end of the term, the bank gives you your initial investment plus interest.

Similarities
Both CDs and fixed annuities (meaning they offer a fixed interest rate for the life of the annuity) are considered safe investments. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for amounts up to $250,000, while annuities are backed by the financial strength of the insurance company. Even if you select a variable annuity, which invests in instruments like stocks and bonds, you are guaranteed to receive at least a minimum amount of interest.
Differences CDs are offered for relatively short time periods like six months or a year, while annuity terms typically last until age 65 when the funds are then used for retirement. Annuity interest is tax-deferred, meaning you won't pay taxes on it until you begin to receive payments. On the other hand, CD interest is taxable as it accrues. Because annuities are life insurance products, they typically don't have to go through the probate process upon your death. Annuities also may offer higher interest rates than CDs.
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IRA CD Rollover Rules

Though certificate of deposit accounts do not allow you to access your funds before the maturity date, you may move your money from one account to another once the term is over in what is known as a CD rollover. The same is true when it comes to an IRA CD Rollover.
 
If you hold a CD in an IRA account, you may choose to move the money in your CD to a different IRA CD account once it matures. Withdrawing money from one retirement account (like an IRA) and depositing it into another is known as a rollover.
 
 
How an IRA CD Rollover Works

A rollover between IRAs is different than a simple transfer and subject to a separate set of rules. When you transfer funds, they are moved straight from the IRA or similar retirement account and into the next by whichever financial institution holds the accounts. You never touch the money and can make as many transfers as you want.
A rollover, however, involves the funds being distributed to you. You must then decide which account you will deposit them into. Since you handle the money, you have to re-deposit it according to specific rules and not spend a dime, or else you will face severe tax consequences.
 
IRA CD Rollover Rules

If you are going to rollover a certificate of deposit from one IRA into another, be sure you understand the rules so you are not penalized:
 
-Once you receive the funds, you have 60 days to roll them over into a new account.
-Only one rollover is permitted ever 365 days
-You cannot rollover an IRA CD before the account matures without facing early withdrawal penalties.
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These rules are meant to help you understand how to rollover an IRA CD. If you have any questions or doubts about the process, it is advisable you speak with a financial professional before making any changes to your existing IRA CD.
 

Can I roll over or transfer a fixed deferred annuity tax free?
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Fixed annuities are similar to bank certificates of deposit (CDs) in that they earn a guaranteed interest rate for a set period of time. Two major differences are that fixed annuities are tax deferred and often provide a higher return than bank CDs. Yes, you can roll over or exchange a fixed annuity for a new annuity. Check to make sure that surrender charges don't apply, however. Typically, a minimum deposit of at least $5,000 will be required. Investment experts strongly recommend that money from one tax-deferred plan be moved intact to another to avoid penalties and future record-keeping hassles (e.g., figuring taxes due on annuity earnings).

When a fixed annuity term ends, investors generally have three options:
-"Annuitize" the fixed annuity by having the issuing insurance company convert the account balance into a stream of  income that can last for the life of owner (or a joint-and-survivor annuity for the owner and the owner's spouse).
-Roll the fixed annuity into another annuity contract using a 1035 exchange. This means that the transfer follows the provisions of IRS tax code section 1035. A financial adviser can assist you with this. By doing a 1035 exchange, you won't have to claim the annuity earnings as income immediately, and you avoid paying taxes at that time (note: annuities are tax-deferred investments, so you will still have to pay taxes upon withdrawal at a later date). With a 1035 exchange, you can exchange a fixed annuity for another fixed annuity or a variable annuity.
-Withdraw the fixed annuity balance, including all of its accrued earnings, and pay taxes and/or any applicable penalty for early withdrawal (if you are younger than 59½).