What is a Fixed Annuity?

An annuity with a guaranteed interest rate of 5% per year for five years, where there are no surrender penalties after five years. Some offer a higher rate the first year, and a lower, but guaranteed rate, for all subsequent years of the surrender period – e.g. 8.5% the first year, with a guaranteed renewal at 4% for years 2-5 for a blended average of 4.88% per year for five years.

The key feature is that you know what interest rate you get for the entire surrender period, and for this reason we ONLY recommend Multi-Year Guarantee Annuities.

Bank CDs are typically issued by banks. As such, they are covered by FDIC guarantees. Fixed annuities are issued by insurance companies, and are not insured by the FDIC. In almost every case, fixed annuity guarantees are subject to the claims-paying ability of the issuing life insurance company — it is important that you check the latest financial strength ratings of the insurance company before investing any money. Fixed annuities are typically covered by state guaranty funds that protect your investment — $100,000 to $300,000 in most states, and up to $500,000 in states such as New York and Washington. Annuity FYI can furnish you with the latest insurance company financial strength ratings, as well as information about the guaranty provided by your state, by clicking here, or by calling 1-866-223-2121

Fixed annuities typically offer higher interest rates than bank CDs. Check our fixed annuities comparison table to check out the most competitive rates, and compare them to CD rates from a source such as Bankrate.com.

Fixed annuities and bank CDs are taxed differently. Unless they are held within a retirement account such as an IRA or 401k, gains on bank CDs are taxed every year; gains on fixed annuities are not, and subsequently your return on a fixed annuity would be greater than a bank CD if the interest rates are equivalent. For example, take an investment of $100,000 at 5% in a CD and a fixed annuity. After year 1, in the fixed annuity you have $105,000. In the bank CD, you have $103,500 (assuming a 30% combined income tax bracket). After five years, the fixed annuity would be worth $127,628, compared with a bank CD of $118,769. If you decided to take income off of the fixed annuity, it will be based on the pre-tax amount — $127,628 in this case. And even if you decided to cash out of the fixed annuity (assume you are over 59½ — see #4 below — and the same 30% tax bracket) you would have $19,339. For an illustration based on your particular investment profile, contact an licensed financial professional at 1-866-223-2121

Keep in mind that if you cash out of a fixed annuity and you are younger than 59½ years old, the IRS will penalize you by taking 10% of interest gains. To avoid the IRS penalty prior to 59½ years of age, you must roll the money into another annuity. In this regard, fixed annuities should be considered retirement vehicles, regardless of the surrender schedule.

Keep in mind that if you cash out of a fixed annuity and you are younger than 59½ years old, the IRS will penalize you by taking 10% of interest gains. To avoid the IRS penalty prior to 59½ years of age, you must roll the money into another annuity. In this regard, fixed annuities should be considered retirement vehicles, regardless of the surrender schedule.

The most competitive fixed annuities typically permit withdrawals of the previous twelve months’ interest, without an insurance company penalty. Some allow you to withdraw 10% of your premium per year without an insurance company penalty. Bank CDs typically do not permit withdrawals without penalties.