Advantages of Fixed Rate Annuities
Fixed rate annuities offer a host of advantages over interest-based and equity-based vehicles. CDs, bonds, and mutual funds have their upsides, but often pale in comparison to a quality fixed annuity. Chief of the advantages offered by fixed rate annuities are: tax-deferred growth, higher rates of return, withdrawal allowances, and bonus retirement options.
Fixed Rate Annuities and Tax-Deferral
The major benefit of a fixed annuity is tax deferral. You pay zero interest rate taxes on annuity income until it's withdrawn, meaning faster growth. Compare this with a CD or money market account, where you have to report and pay income annually, and the advantage becomes tangible. Even though fixed annuity income is eventually taxed, it's far preferable to re-invest that money and earn compound interest rather than handing it over to the IRS. With a fixed rate annuity you can keep your money longer, earn interest on it, and only then pay it back to the IRS — it's like a tax-free loan.
Moreover, retirees often drop tax brackets as they settle into their retirement income, resulting in futhure savings.
Higher Interest on Fixed Rate Annuities
In comparison to various interest-based investment vehicles, fixed annuities offer higher rates without sacrificing income guarantees. A fixed annuity typically yields 2-5% depending on choice of carrier, contract duration, and market conditions. A CD, on the other hand, yields 2-5%. A money market account yields 2-4%.
Investing in money market accounts makes sense despite the lower rates because of their liquidity and no-oblidation nature. CDs, however, are inferior to fixed rate annuities because they ofter less features, flexiblity, and lower rates. CDs are generally only preferable to fixed annuities for younger investors, who would incur the 10% tax penalty for withdrawing before the age of 59.5.
Fixed Annuity Withdrawal Allowances
Unlike CDs, fixed rate annuities allow you to withdraw partial sums without liquidating the entire account or forfeiting earns. CDs can charge up to a 60% account penalty when cashed out early. Moreover, you cannot cashout part of a CD. Annuities are better in this regard. And although fixed annuities usually come with withdrawal penatlies, the standard 10% withdrawal window allows you to cashout up to 10% of your earns, penalty-free, every year. Contrary to popular belief, annuities are often more flexible than CDs.
Retirement Options on Fixed Annuities
Fixed annuities offer greater flexibility in terms of options and riders. A deferred fixed annuity can usually be transformed into a lifetime annuity that guarantees a steady monthly check for the remainder of your life. Future payment structures can be changed by the annuity owner, and riders can add extra security features to your contract. For example, an enhanced death benefit rider will provide a larger payout to loved ones upon death. In many ways, a fixed annuity can be seen as a life insurance/CD hybrid.
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