Saving for future goals is not easy. Hopefully, I can help explain the differences between two commonly used tools: certificates of deposit (CDs) and Deferred Annuities (DAs).
CDs and DAs allow single or multiple individuals to accumulate money and earn interest for future goals. The differences between them should be considered when deciding which is best for you.
CDs are issued by commercial banks or credit unions and are guaranteed by the Federal Deposit Insurance Corp. or National Credit Union Administration.
Deferred annuities are issued by insurance companies, and if an insurance company participates, annuities can be guaranteed by state insurance pools. In either case, there are limits per CD and per annuity.
CDs and DAs are issued for time periods, and both can be renewed automatically. Choosing to renew is the owner's responsibility. Keep track of current interest rates and when your CD or DA comes to maturity.
Taxation may be a major reason for choosing one product over another. CDs are taxed annually, but the interest earned is not paid to you until you redeem the CD. You could have a tax bill without the money to pay it.
DAs are not taxed until you take the money. Deferring taxation can create a larger pot of money over time.
Access to your money is also important. CDs and DAs both have penalties for early surrenders. Today, most DAs have provisions for early withdrawals without penalties.
Flexibility may also be important to you. CDs and DAs have limits when opening an account. CD limits are usual smaller, but require you to open new CDs when you accumulate more money. DAs require larger opening amounts, but allow you to add to the account.
When choosing a CD or DA, always ask: How long is the interest rate guaranteed? What penalties will I have for early withdrawal? Who guarantees my money? How much is my CD or annuity guaranteed for?
In the case of DAs, what is the rating of the issuing company?
Bob Hollick is a State Farm Insurance agent based in Washington.
To submit columns on financial planning or investing, email Rick Shrum at [email protected].