Retirement Choices: CDs and Annuities Offer Taxable Returns Now or Tax Deferred Growth For the Future

Retirement Choices a graph

Retirement Choices

It can be confusing for your clients to discern whether certificates of
deposit or annuities are a better investment for their retirement future. On second thought, perhaps the idea of what’s an investment needs redefined. Most of your clients will understand that a certificate of deposit (CD) is an investment. They deposit their money in the bank. The bank may give them an official looking certificate showing that they’ve bought a CD. In this era of instant gratification, some clients may cringe at keeping CDs in the bank for a predetermined number of years before cashing it in for their principal investment plus interest. Still, it’s a basic, uncomplicated investment.

An annuity, on the other hand, although investing in your client’s future, should be presented as insurance for that future. Someday your client may use that annuity for multiple payouts over time, ensuring a steady, reliable income stream. Unlike CDs, there are wider choices of annuities to choose from–and unlike CDs, they are tax-deferred until the money’s withdrawn.

Would a CD or an Annuity Benefit Your Client the Most?

Some clients will prefer CDs because they are straightforward and that’s fine. CDs generally mature in a few months up to five years. Clients must be comfortable with the concept of annuities because their money will be tied up–but they offer choices, some more straightforward than others. With annuities, your client can pick the option of getting a lump sum settlement from the annuity or that steady stream of payments. Also fine. Choosing one over the other depends on what an individual’s situation is and what they’re wanting to gain from it.

Maybe the crux of the decision boils down to these three questions:

  • Does your client need a short-term investment?
  • Is your client okay with cashing in on that investment and paying taxes on their earnings?
  • Would your client prefer a financial vehicle that offers tax deferred growth and no tax until their money is withdrawn?

CDs are great if your client wants a short-term investment that s(he) can use for something in particular like college tuition and trips. Perhaps higher interest rates than traditional savings accounts appeal to the saver who wants to keep reinvesting their CDs. It’s important to reiterate that CDs don’t tie up money long-term, but when CDs are cashed out that the earnings are taxable.

Annuities can tie up funds for the long-term, but offer tax-deferred growth. That’s an attractive feature–so is that reliable income stream at retirement. Plus, the amount of money that your clients can throw into an annuity isn’t capped like it is in an IRA or 401(k). Offering your clients a choice of immediate, fixed, or variable income payouts is another attractive feature of annuities.

Taxable Earnings or Tax-Deferred Growth?

Will your clients think of their choice as an investment or as a wealth plan? Tax-deferred monies allow the building of retirement portfolios more quickly. Your clients don’t pay income taxes or capital gains taxes until they get their money. It can be in a lump sum or in distributed payouts. Emphasizing long-term wealth over short-term payouts may help clients get a handle on what they want for their future.

Consider the fixed index annuity to explain the concept of wealth planning. It’s benchmarked to one of the stock market indices, not to an interest rate like a CD. Clients can’t lose any principal and the insurance company bears the brunt of the market risk–meaning that if the stock market index that the annuity is using as its benchmark fluctuates, their annuity is protected. The fixed index annuity offers tax-deferred growth and allows for multiple deposits over time. They’re safe and premiums and earnings are guaranteed by the issuing insurance company.

There are many types of annuities and they can be complex to sift through. But they also offer buyers tax-deferred savings, flexibility and choice. Certificates of deposit are appealing to those who want short-term, straightforward investments. What kind your clients want depends on focusing on their needs. There are many online annuity calculators that can help them plan accordingly.

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