Annuity vs CD: What Tennessee Savers Need to Know

Annuity vs CD: What Tennessee Savers Need to Know

Annuity vs. CD in Tennessee? Compare taxes, liquidity, and retirement income to find the option that fits your financial goals.

Full written article: Annuity vs CD: What Tennessee Savers Need to Know

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 in Knoxville, just turned 67, and she's got about $80,000 sitting in a savings account doing basically nothing. And uh she kept going back and forth between putting it in a CD or some kind of annuity. Um and honestly, she couldn't figure out why they even felt different. They both sounded the same to her.

SPEAKER_00 1:03

That's such a common place to get stuck. On the surface, they really do look similar. You get a stated interest rate, it runs for a set period, and neither one is tied to the stock market. So people hear that and think, okay, these are basically the same thing with different names.

SPEAKER_01 1:16

Right. And that's where she was. But they're not the same thing, and I think the differences actually matter a lot depending on what you're trying to do with the money.

SPEAKER_00 1:26

They really do. And I'd say the biggest difference, the one that catches people off guard the most, yes, is how taxes work. Because with a CD, the bank is reporting your interest to the IRS every single year on a Form 1099 CNT, even if you haven't touched the money, even if you're just letting it sit there and compound.

SPEAKER_01 1:42

Wait, so you're paying taxes on money you haven't actually received yet?

SPEAKER_00 1:47

Essentially, yes. Uh the interest is credited to your account, so technically you have access to it, which is why the IRS treats it as income. But if you're in a decent income year, still doing some part-time work, taking Social Security or whatever, that extra taxable income can push you into a higher bracket.

SPEAKER_01 2:02

Okay, that's actually a bigger deal than I think most people realize. My aunt is still doing some consulting work, so she's not in a low income uh year by any stretch.

SPEAKER_00 2:14

Aaron Powell And that's exactly the kind of situation where the tax deferral on a fixed annuity starts to look attractive. With an annuity, the interest grows inside the contract and you don't owe taxes on it until you actually take money out. So you have some control over when that income hits your tax return.

SPEAKER_01 2:30

Aaron Powell Which is useful if you think you'll be in a lower bracket later.

SPEAKER_00 2:34

Exactly. And Tennessee is interesting because there's no state income tax on wages or retirement income at the state level, but annuity distributions are still subject to federal income tax. So the ability to time those distributions to pull money in a year when your income is lower, that has real dollar value.

SPEAKER_01 2:50

Aaron Powell Okay, but I want to push back a little here because I feel like you're making annuities sound like the obvious winner on taxes, and I don't think it's that clean.

SPEAKER_00 3:00

No, you're right to push back. It's not that clean at all.

SPEAKER_01 3:03

Because if someone puts money into an annuity inside an IRA, for example, the IRA already has tax deferral. So the annuities tax deferral isn't adding anything extra in that case.

SPEAKER_00 3:13

Aaron Powell That's a really important point. If the money is already in a tax-deferred account, the annuity wrapper isn't giving you an additional tax benefit. The deferral advantage is really most meaningful when you're using non-IRA money, what people call non-qualified funds.

SPEAKER_01 3:27

Good. Okay, so taxes are one big difference. What else?

SPEAKER_00 3:30

Liquidity is a huge one. And this is where I think a lot of people get burned, uh, or at least surprised. Both products penalize you for pulling money out early, but the way they do it is pretty different.

SPEAKER_01 3:41

With a CD, it's pretty simple, right? You break it early, you give up some interest.

SPEAKER_00 3:45

Usually a few months' worth of interest? Yeah. It stings a little, but it's not catastrophic. With a fixed annuity, you've got what's called a surrender charge period. And that can run anywhere from three years to ten years, depending on the contract. And if you pull out more than what the contract allows, typically up to 10% per year without a charge, you're paying a percentage of the amount you withdraw.

SPEAKER_01 4:07

And that percentage can be significant in the early years.

SPEAKER_00 4:10

It can be. It usually steps down over time. So year one might be seven or eight percent. Year five might be three percent, and by the end of the surrender period it's gone. But if you need that money in year two for an emergency, you're feeling it.

SPEAKER_01 4:23

This is actually what I think about with my aunt's situation. She's sixty-seven, she's not sure when she might need to tap into this. She's got some other savings, but this would be a pretty significant chunk.

SPEAKER_00 4:36

And that uncertainty is a real factor. If there's any real chance she needs that 80,000 in the next couple of years, a long surrender period is a problem. A shorter-term CD or even a CD ladder might be a better fit for that portion of her savings.

SPEAKER_01 4:50

Explain the ladder thing, because I know some people swear by it, and I've never totally understood why.

SPEAKER_00 4:55

So instead of putting all your money into one CD with one maturity date, you split it up. Maybe you put some into a one-year CD, some into a two-year, some into a three-year. As each one matures, you either spend it or roll it into a new CD. The idea is that you always have something coming due relatively soon, so you're not completely locked up.

SPEAKER_01 5:17

It's basically building in your own liquidity schedule.

SPEAKER_00 5:20

Right. And some people do a version of this with annuities too. Staggering contracts with different terms, but the CD ladder is a more common approach for people who want that rolling access.

SPEAKER_01 5:31

Okay, so let's talk about the rate structure because I think this is another place where people assume CDs and annuities work the same way. And um they really don't.

SPEAKER_00 5:41

Uh yeah, this is a nuance that matters. With a CD, the rate you lock in at purchase is the rate for the whole term. Full stop. When it renews, it renews at whatever rates are current at that time, which could be higher or lower. But during the term, you know exactly what you're getting.

SPEAKER_01 5:58

And uh with a fixed annuity, it's more complicated.

SPEAKER_00 6:01

It can be. Some fixed annuities set an initial rate for a certain period, say the first year or two, and then the rate can adjust after that. It can't go below the contract's stated minimum, so there's a floor, but it's not necessarily locked in for the full term.

SPEAKER_01 6:17

Aaron Powell Which sounds a little less predictable than a CD.

SPEAKER_00 6:20

Aaron Powell In that structure, yes. Uh but there's a specific type of annuity called a multi-year guaranteed annuity. People call it a MIGA, and that one locks in a rate for the entire term, uh similar to how a CD works. Uh so if you want the predictability of a fixed rate, but you also want the tax deferral benefit, a MYGA is often what people are looking at.

SPEAKER_01 6:40

Aaron Powell So the MIGA is kind of the closest apples to apples comparison to a CD in the annuity world.

SPEAKER_00 6:48

Structurally, yeah. Same idea. Um you know the rate going in, it holds for the full term. The differences are still there on the tax side and the liquidity side, but the rate certainty is similar.

SPEAKER_01 6:59

Aaron Powell All right. Here's the one that I think is actually the most underappreciated difference. What happens at the end of the term?

SPEAKER_00 7:06

Oh, this is the big one for retirement planning.

SPEAKER_01 7:09

Because with a CD, when it matures, you get your principal back plus the interest done, you can roll it, you can spend it, but that's the end of the road for that contract.

SPEAKER_00 7:18

And that's fine for a lot of purposes. But a fixed annuity gives you options that a CD simply cannot. You can take a lump sum, sure. You can set up payments over a defined number of years. Or, and this is the one that's really unique to annuities, you can elect a lifetime income stream. Payments that continue for as long as you live, no matter how long that is.

SPEAKER_01 7:38

Which is the thing that no CD can do.

SPEAKER_00 7:40

No CD, no savings account, no bond ladder can do that. The longevity protection piece is genuinely unique to insurance contracts. If you live to 95, the payments keep coming.

SPEAKER_01 7:52

I think about my aunt again here. She's 67, she could easily live another 25 years. And if she runs out of money at 85, that's a real problem.

SPEAKER_00 8:01

That's exactly the scenario where the lifetime income option becomes really compelling. It's essentially transferring the longevity risk, the risk of outliving your money, to the insurance company.

SPEAKER_01 8:11

But I want to make sure we say this clearly.

SPEAKER_00 8:23

CDs are FDIC insured up to the applicable limits. Generally $250,000 per depositor per institution. Annuities don't have that. What they have is the claims paying ability of the issuing insurance company. And states do have guarantee associations that provide some protection. But it's not the same as FDIC insurance.

SPEAKER_01 8:44

So for someone who really values that federal deposit insurance, the CD has a genuine advantage there.

SPEAKER_00 8:50

Aaron Powell Absolutely. That's not a trivial thing, especially for someone who's more conservative and wants that explicit government-backed protection on their principle.

SPEAKER_01 8:58

Okay, so let's try to put this together practically, because I feel like we've laid out a lot of differences and I don't want people to walk away thinking one is always better than the other.

SPEAKER_00 9:08

They're not. They're genuinely different tools for different jobs. Um if you're saving for something specific in the next one to three years, a home purchase, a car, a planned expense, a CD's shorter terms, and simpler structure probably make more sense. You know, when the money comes back, you've got FDIC protection and you're not locked into a long surrender period. But if you're further out from needing the money and you're thinking about retirement income, then the tax deferral and the lifetime income options start to matter a lot more. Um and the surrender charge period is less of a concern if you're genuinely not going to need the money for seven or ten years anyway.

SPEAKER_01 9:44

I actually know someone, a guy I went to college with. His dad is 62, just retired early, had about a hundred and twenty thousand dollars to figure out what to do with. And he was looking at a five-year CD versus a MIGA. And the thing that tipped him toward the MIGA wasn't even the rate, it was the tax piece. He had a really high income year from selling some property, and he did not want more taxable income showing up on his return for the next five years.

SPEAKER_00 10:17

That's a really common trigger for the annuity conversation, actually. A liquidity event, selling a business, selling property, an inheritance, where someone suddenly has a chunk of money and they're trying to manage the tax impact.

SPEAKER_01 10:28

Aaron Powell And the MEGA let him defer that. The interest just sits inside the contract, doesn't show up on his 1099 every year.

SPEAKER_00 10:36

Right. Now he will eventually pay federal income tax on those earnings when he withdraws. It's not that the tax goes away, it's that he gets to choose when. And if his income is lower in five years than it is today, he comes out ahead.

SPEAKER_01 10:49

That timing control is actually really valuable, and I don't think it gets talked about enough.

SPEAKER_00 10:54

It doesn't. People focus on the rate, which rate is higher, and that's understandable. But the after-tax outcome is what actually matters. And that's a harder calculation that depends on your specific situation.

SPEAKER_01 11:05

Which is why we keep saying talk to a licensed agent, not because we're dodging the question, but because the right answer genuinely depends on things we don't know about your tax situation, your timeline, your other income sources.

SPEAKER_00 11:20

And a licensed agent who works with both products can actually run the numbers for your specific situation. They can show you current MIGA rates, walk you through the surrender schedule on a particular contract, help you think through how either product fits with whatever else you've got going on.

SPEAKER_01 11:36

And I think the other thing worth saying is that it doesn't have to be either or. You can do both.

SPEAKER_00 11:41

Totally. Some people use CDs for the near-term money, the stuff they might need in the next year or two, and then put a longer-term chunk into a fixed annuity or MIGA for the tax-deferred growth. You're not choosing a team, you're just matching the right tool to the right job.

SPEAKER_01 11:57

So if someone's sitting down to think through this decision, what are the questions they should actually be asking themselves before they walk into that conversation with an agent?

SPEAKER_00 12:08

First one, how soon might I actually need this money? Be honest with yourself. If there's a real chance you need it in 18 months, a long surrender period is a problem regardless of anything else.

SPEAKER_01 12:19

That's the one people underestimate. They think they won't need it, and then life happens.

SPEAKER_00 12:24

Second question: What's my tax situation likely to look like when I retire? Am I going to be in a lower bracket, a higher bracket, about the same? Because that determines how much the tax deferral is actually worth to you.

SPEAKER_01 12:37

And third, do I want the option of lifetime income, or is a lump sum at the end of the term enough for what I'm trying to do?

SPEAKER_00 12:44

That one's really about what role this money plays in your overall retirement picture. If you've got a pension and social security covering your basic expenses, a lump sum at maturity might be totally fine. If this is a significant part of how you're going to fund your retirement, the lifetime income option is worth taking seriously.

SPEAKER_01 13:05

And then the FDIC question. How important is that federal deposit insurance to you versus the contractual protections of an annuity?

SPEAKER_00 13:14

Aaron Powell Which is partly a comfort question and partly a practical question about how much you're putting in. If you're over the FDIC limits at one institution, you've got to think about that differently anyway.

SPEAKER_01 13:25

Right. Okay. I feel like we've covered a lot of ground here. The tax treatment is different. The liquidity mechanics are different. The rate structure can be different depending on the annuity type. And what you can do with the money at the end is very different.

SPEAKER_00 13:40

And none of those differences make one product universally better. They make each product better for certain situations. A 60-year-old in Memphis building toward retirement income is in a very different situation than a 45-year-old in Nashville saving for a down payment in three years.

SPEAKER_01 13:55

And what works for one of them could be the wrong call for the other.

SPEAKER_00 13:58

Exactly. That's why this conversation, the annuity versus CD conversation, really needs to start with what you're trying to accomplish, not with which rate looks higher on a website today.

SPEAKER_01 14:07

Because the rate is one variable in a much bigger picture.

SPEAKER_00 14:11

One variable, and not always the most important one.

SPEAKER_01 14:16

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

SPEAKER_00 14:19

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

SPEAKER_01 14:22

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

SPEAKER_00 14:27

We'll see you next time.