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.
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 While there's no tax deduction on money put into an annuity, investment gains are tax deferred until they are withdrawn, with all payouts taxed as income as with an individual retirement account or 401(k).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.
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.