Deferred Annuity vs. CD: A Tennessee Buyer's Guide

Deferred Annuity vs. CD: A Tennessee Buyer's Guide

This deferred annuity guide helps Tennessee residents compare fixed deferred annuities and CDs across taxes, liquidity, and long-term income options.

Full written article: Deferred Annuity vs. CD: A Tennessee Buyer's Guide

Tennessee Annuity Rates

Transcript

SPEAKER_01 0:03

Welcome to the Tennessee Annuity Show. I'm Jessica.

SPEAKER_00 0:06

And I'm Caleb. We break down complex annuity products in plain English, fixed annuities, indexed annuities, income annuities, all of it.

SPEAKER_01 0:13

We cover the products, the fine print, and the questions you should ask before you sign anything.

SPEAKER_00 0:18

Quick note before we start. This show is for general information only and is not financial, tax, or legal advice. Annuity guarantees depend on the issuing insurance company's ability to pay claims. Talk with a licensed professional before making decisions about your retirement income.

SPEAKER_01 0:33

All right, let's get into today's episode. So I had a conversation with my aunt over the holidays. She's 68, lives outside of Chattanooga, just rolled over a chunk of her savings from a CD that matured. And her question was basically: why would I ever do anything other than a CD? I know what it is, I know the bank, the FDIC covers it. Why complicate things?

SPEAKER_00 0:59

That is such a common place to start. And honestly, it's a fair question. CDs are simple, they're familiar, and that federal deposit insurance piece is real and meaningful. Uh I don't want to dismiss that.

SPEAKER_01 1:09

Right. And I think that's where a lot of people in Tennessee are sitting right now. Rates went up over the last couple of years. CDs started looking attractive again, and people who maybe hadn't thought about them in a decade suddenly had a reason to pay attention.

SPEAKER_00 1:26

Exactly. But here's where I'd push back on your aunt's framing a little. And I say this respectfully.

SPEAKER_01 1:36

Okay, so walk me through that because I think she'd say I want it to grow and I want it to be safe.

SPEAKER_00 1:41

Sure. And both products can do that to a degree. A CD is a bank product, you put in a lump sum, you get a fixed rate for a set term, and when it matures, you get your money back plus the interest. Simple. A fixed deferred annuity is an insurance contract. Totally different legal structure. But on the surface, it looks similar. You put in a premium, you get a fixed rate, your money grows.

SPEAKER_01 2:05

So if they look the same on the surface, what's actually different underneath? Right, because annuities aren't FDIC insured. That's the thing people always bring up.

SPEAKER_00 2:25

They're not, and that's true. CDs at FDIC member banks are covered up to $250,000 per account owner. That's a federal backstop, and it's well understood. Annuities don't have that. But, and this is important, Tennessee does participate in a state guarantee association that provides a layer of protection if an insurer becomes insolvent.

SPEAKER_01 2:47

I feel like most people have no idea that exists.

SPEAKER_00 2:50

Most don't. And I'm not saying it's equivalent to FDIC coverage. The limits are different and the mechanics are different. But it's not like there's zero protection on the annuity side. The other thing you can do is look at the insurance company's ratings from agencies like AM Best or Moody's before you buy.

SPEAKER_01 3:08

Okay, so the safety picture is more nuanced than just FDIC yes or no.

SPEAKER_00 3:13

Exactly. Now the second big difference is time horizon. And this is where I think the conversation gets really important for someone like your aunt.

SPEAKER_01 3:19

Because she's 68, so she's not exactly parking money she needs next month.

SPEAKER_00 3:24

Right. CDs are genuinely great for short to medium-term goals. You need the money in one to three years, you know the date, you want simplicity. CD makes a lot of sense. But fixed deferred annuities are built for longer time horizons. The surrender charge periods often run five to ten years, and the features that make them interesting, we'll get to those, they really reward patience.

SPEAKER_01 3:47

And surrender charges are the thing where if you pull money out early, you get hit with a penalty.

SPEAKER_00 3:52

Yeah, similar concept to a CD's early withdrawal penalty, but the structure is a little different. Most annuity contracts actually allow you to take out up to 10% of the account value per year without any surrender charge. CDs are usually more all or nothing. You either leave it alone or you will pay the penalty on the whole thing.

SPEAKER_01 4:10

Wait, I didn't know that about annuities. So there's more flexibility built in than people assume.

SPEAKER_00 4:16

For partial withdrawals, yes. You're not completely locked in, but go beyond that 10% during the surrender period, and yes, there's a charge. And it's worth noting, any withdrawal from an annuity is taxable income. And if you're under 59 and a half, you're also looking at a 10% IRS penalty on top of that.

SPEAKER_01 4:33

Okay, that's the same rule as an IRA or a 401k, basically.

SPEAKER_00 4:37

Same IRS rule, yes. Which brings me to the tax piece because this is honestly the biggest practical difference for a lot of Tennessee retirees.

SPEAKER_01 4:45

Lay it out for me because I think this is the one that surprises people the most.

SPEAKER_00 4:50

Okay. So with a CD, the interest is taxable in the year it's credited. Doesn't matter if you never touch the money, doesn't matter if it just sits there compounding. Uh the IRS considers it income that year, and it gets added to your ordinary income.

SPEAKER_01 5:04

Which a lot of people don't realize until they get the form from the bank.

SPEAKER_00 5:08

Exactly, the 1099. And for someone who's retired and trying to manage their taxable income carefully, that can actually create problems. With a fixed deferred annuity, the earnings accumulate on a tax-deferred basis. You don't owe anything on the growth until you actually take a distribution.

SPEAKER_01 5:23

So if you're in a lower tax bracket now than you expect to be. Wait, no, the other way around, if you expect to be in a lower bracket later.

SPEAKER_00 5:32

Yes. That's the classic scenario. If you think your income will be lower in retirement, which is true for a lot of people, deferring that tax hit until later can work in your favor.

SPEAKER_01 5:44

And uh there's also the social security piece, right? Because I've heard that income thresholds affect how much of your social security gets taxed.

SPEAKER_00 5:54

Aaron Powell This is a really underappreciated point. In 2025, couples filing jointly with combined income below $32,000 owe no federal income tax on their social security benefits. Between $32,000 and $44,000, up to 50% of benefits can be taxable. Above $44,000, up to 85%.

SPEAKER_01 6:13

Aaron Powell So if a CD is throwing off taxable interest every year, it could push you over one of those thresholds.

SPEAKER_00 6:19

It can. And that's not hypothetical. I've seen people surprised by exactly that. Whereas if that same money is sitting in a deferred annuity and not generating taxable income yet, it might help some households stay below those thresholds. Now, I have to say clearly, talk to a tax professional about your specific situation. This is not tax advice, but it's a real consideration.

SPEAKER_01 6:40

That feels like the kind of thing an agent should be walking people through when they're comparing options.

SPEAKER_00 6:46

A good one will. Okay, let me bring up the interest rate structure. Because there's a subtle but important difference here that I don't think gets enough attention.

SPEAKER_01 6:54

Go for it.

SPEAKER_00 6:55

Both products give you a fixed rate for an initial term. That part looks the same. But when a CD matures and renews, the bank sets a new rate based on whatever market conditions are at that moment. There's no contractual floor. If rates have dropped, you get whatever the bank is offering.

SPEAKER_01 7:10

Which we all live through in like 2010 to 2021. CD rates were basically nothing.

SPEAKER_00 7:15

Right. A fixed deferred annuity typically includes a contractual minimum interest rate. It's written into the contract. So even if rates fall to the floor, the insurance company is obligated to credit at least that minimum. It might not be exciting, but it's a floor.

SPEAKER_01 7:31

That's actually a meaningful protection for someone who's thinking about a ten-year horizon.

SPEAKER_00 7:36

It is. And this is actually a good moment to mention Migas. Multi-year guaranteed annuities. These are a specific type of fixed deferred annuity that lock in a rate for a defined term, kind of like a CD does. Three years, five years, seven years. They're often the product people are comparing directly to CDs.

SPEAKER_01 7:58

So if someone's shopping a five-year CD, they might also want to look at a five-year MIGA side by side.

SPEAKER_00 8:05

Exactly. And the rates vary by carrier and term length. So that's really a conversation to have with a licensed agent who can pull current numbers. I'm not going to quote specific rates here because they change.

SPEAKER_01 8:16

Fair enough. Okay, I want to go back to something you mentioned earlier, the lifetime income piece. Because I feel like that's the thing that really separates annuities from everything else.

SPEAKER_00 8:29

It is. And this is where the purpose built for retirement thing really shows up. When a CD matures, your options are pretty simple. Take the cash, roll into a new CD, or move it somewhere else. When a fixed deferred annuity matures, you have all those same options, but you also have the ability to convert your account value into a stream of income that lasts for the rest of your life.

SPEAKER_01 8:51

Which a CD just cannot do.

SPEAKER_00 8:53

Cannot do. A CD will run out of money if you live long enough. An annuity with a lifetime income option, it doesn't. That's an insurance feature. That's what makes it an insurance contract.

SPEAKER_01 9:03

Let me throw a scenario at you. Picture a couple, both 65, they've got $100,000 sitting in a CD that's about to mature. They're not touching Social Security for a few more years. They don't need the money right now. What does the comparison look like for them?

SPEAKER_00 9:20

So for that couple, the CD question is what's the rate? What's the term? And are you okay with paying income tax on the interest every year, even though you're not spending it? Because at $100,000, even a modest rate generates meaningful taxable interest annually.

SPEAKER_01 9:37

Right. That could be a few thousand dollars of income they didn't plan for.

SPEAKER_00 9:40

And depending on their other income, that could affect their Social Security taxation, like we talked about. The annuity option for that same couple, they put the $100,000 into a fixed deferred annuity. It grows tax deferred. They're not getting a $1099 every year. And when they're ready, say at $70 or $72, they can either take lump sum distributions or turn it into lifetime income.

SPEAKER_01 10:01

That's a pretty compelling picture for someone who doesn't need the money right now.

SPEAKER_00 10:05

It can be. But, and I want to be honest here, if that couple has any real chance of needing that full hundred thousand in the next two or three years, the surrender charge period on an annuity could be a problem. You don't want to be locked into a seven-year surrender schedule if there's a real possibility of a major expense.

SPEAKER_01 10:23

Like a home renovation or a health situation.

SPEAKER_00 10:26

Exactly. The 10% annual penalty-free withdrawal helps, but it doesn't solve everything. So the time horizon question is genuinely important before you decide.

SPEAKER_01 10:34

Okay. Um there's one more thing from the article I want to make sure we cover, because I think it's one of those things people only think about after it's too late. The beneficiary piece.

SPEAKER_00 10:45

Oh, this is a good one. And you're right that it gets overlooked.

SPEAKER_01 10:48

So what's the difference when someone passes away?

SPEAKER_00 10:51

With a fixed deferred annuity, the death benefit goes directly to the named beneficiary. It doesn't have to go through probate. The insurance company pays it out to whoever is named on the contract.

SPEAKER_01 11:00

And with a CD?

SPEAKER_00 11:01

It depends. If the CD has a payable on death designation set up at the bank, it can transfer similarly. But if it doesn't, and a lot of people never set that up, it may have to go through the estate process. Which means probate court, which means time and legal costs for the family.

SPEAKER_01 11:18

I actually know someone who went through this. Her father passed, had a substantial CD at a bank, no POD designation. It took months to sort out, and there were attorney fees involved.

SPEAKER_00 11:29

That's unfortunately common. And for families in Memphis or Nashville or anywhere in Tennessee who are thinking about what happens to this money after they're gone, that's a real practical difference.

SPEAKER_01 11:38

Now I want to make sure we're not overselling this. Large estates can still have estate tax issues regardless of which product you hold, right?

SPEAKER_00 11:46

Correct. Bypassing probate doesn't mean bypassing estate taxes if the estate is large enough. Those are different things. The annuities beneficiary designation helps with the probate process and the timing, but it doesn't make assets disappear from the estate for tax purposes. Again, estate planning attorney is the right person to talk to about that.

SPEAKER_01 12:06

Okay, let me ask the question I know some listeners are going to have.

SPEAKER_00 12:14

Yes, you can. When the annuity contract matures or after the surrender period ends, you can take a lump sum distribution and put it wherever you want, including a CD. The thing to know is that distribution is taxable income in the year you receive it. So if you've got a large accumulated value, you could be looking at a significant tax event in that year.

SPEAKER_01 12:37

Which is another reason to think about this stuff in advance, rather than just reacting when something matures.

SPEAKER_00 12:44

Exactly. Timing distributions, whether from an annuity or any other tax-deferred account, is something worth planning around, not just doing on autopilot.

SPEAKER_01 12:52

All right, let me try to pull this together. Because I feel like we've covered a lot of ground, and I want to make sure it's actually useful for someone sitting in Tennessee right now trying to make this decision.

SPEAKER_00 13:07

Go for it.

SPEAKER_01 13:08

So if you need the money within the next one to three years, or you really want that FDIC coverage, or you just want simplicity, CD probably makes more sense. No argument there.

SPEAKER_00 13:20

Agreed. CDs are a legitimate, useful product. Um, I don't want anything we've said today to sound like we're dismissing them.

SPEAKER_01 13:26

But if you've got a longer time horizon, you're trying to manage your taxable income in retirement, you care about the social security threshold stuff, and you want the option of lifetime income down the road, a fixed, deferred annuity is worth a serious look.

SPEAKER_00 13:43

And the my GA comparison specifically, um, if you're looking at a five-year CD, look at a five-year MIGA at the same time. Same general structure, but with tax deferral and a contractual rate floor. They're not identical, but they're close enough that you really should see both numbers before you decide.

SPEAKER_01 13:59

And neither of us is going to tell you which one to pick, because that genuinely depends on your situation.

SPEAKER_00 14:05

Right. This is the kind of conversation to have with a licensed insurance agent who can actually pull current Tennessee annuity rates and current CD rates and put them side by side for your specific numbers. Uh we can explain how the products work, and I hope we have, but the right choice for your aunt in Chattanooga is not the same as the right choice for a 45-year-old in Knoxville who's still 15 years from retirement.

SPEAKER_01 14:26

Although, Caleb, should a 45-year-old even be looking at fixed deferred annuities?

SPEAKER_00 14:31

Honestly, uh it's not the most common use case, but it's not crazy either. If they have after-tax money, they want to grow tax-deferred, and they've already maxed out their other retirement accounts, a deferred annuity can make sense. The surrender period is less of a concern if you've got a long runway, but yeah, it's more of a pre-retirement and retirement tool for most people.

SPEAKER_01 14:50

That's a fair answer. Okay, one last thing. Um, I want to go back to my aunt for a second. Because her instinct was basically I know what a CD is and I trust it. And I think that instinct is actually healthy. You shouldn't put money into something you don't understand.

SPEAKER_00 15:09

100%. And I'd say the same thing about annuities. If someone doesn't understand the surrender schedule, doesn't understand uh the tax treatment on withdrawal, doesn't understand what happens at maturity, they're not ready to buy one. Understanding the product is not optional.

SPEAKER_01 15:25

Which is kind of what we're trying to do here. Give people enough of the framework that when they do sit down with an agent, they're not starting from zero.

SPEAKER_00 15:35

That's exactly it. Walk in, knowing the six areas we talked about uh safety, time horizon, interest rate structure, tax treatment, access rules, and what happens at maturity. If you've got those in your head, you're going to have a much more productive conversation.

SPEAKER_01 15:52

And you're going to know what questions to ask.

SPEAKER_00 15:54

And you're going to know when the answer you're getting doesn't quite add up, which is honestly just as important.

SPEAKER_01 16:03

That's it for today's Tennessee Annuity Show.

SPEAKER_00 16:05

If you have questions about your specific situation, talk to a licensed advisor.

SPEAKER_01 16:09

Visit Tennessee AnnuityRates.com for show notes or to get matched to an advisor.

SPEAKER_00 16:14

We'll see you next time.