Annuity vs CD: Which Makes More Sense for Tennessee Savers?

Annuity vs CD: Which Makes More Sense for Tennessee Savers?

Comparing annuity vs CD options in Tennessee? Learn how these two products differ in taxes, terms, and payout so you can ask better questions before you buy.

Full written article: Annuity vs CD: Which Makes More Sense for Tennessee Savers?

Tennessee Annuity Rates

Transcript

SPEAKER_00 0:03

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

SPEAKER_01 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_00 0:13

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

SPEAKER_01 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_00 0:33

All right, let's get into today's episode. So I had a friend reach out to me last week. She's in her early 60s, just retired, lives outside of Knoxville, and she had about $80,000 sitting in a savings account earning basically nothing. And her banker suggested a CD, but then her neighbor mentioned something about a fixed annuity. And she called me like, Wow, Jessica, what's the difference? Aren't they basically the same thing?

SPEAKER_01 1:04

And uh the honest answer is they feel similar on the surface. You put money in, it earns interest, you leave it alone for a while. But once you get past that surface level, they are actually pretty different products.

SPEAKER_00 1:16

Right. And I think that's exactly where people get tripped up. They look at the rate, they see a number, and they think they're comparing apples to apples.

SPEAKER_01 1:27

And they're really not. The first thing I always tell people is these products don't even come from the same type of institution. A CD is issued by a bank or a credit union. A fixed annuity is an insurance contract. It's issued by a life insurance company. That one distinction drives almost every other difference we're going to talk about.

SPEAKER_00 1:46

Okay, so walk me through how a CD actually works because I want to make sure we're not assuming people already know.

SPEAKER_01 1:53

Sure. With a CD, you hand a bank a lump sum, you agree on a term, could be six months, could be two years, could be five years, and the bank pays you a fixed interest rate for that term. When the term ends, you get your original deposit back plus whatever interest you earned. Pretty clean.

SPEAKER_00 2:10

And if you pull the money out early?

SPEAKER_01 2:12

Early withdrawal penalty. Usually it's a few months' worth of interest, sometimes more, depending on the bank. Uh, but there are no ongoing fees, no complicated add-ons. What you see is genuinely what you get.

SPEAKER_00 2:23

Which honestly, I think is part of the appeal for a lot of people. It's simple. You don't have to read a 30-page contract.

SPEAKER_01 2:29

That simplicity is a real advantage. I don't want to undersell it. But a fixed annuity works differently. And the differences matter. With a fixed annuity, you're also depositing money and earning a contractual interest rate. But there are two distinct phases. Um there's the accumulation phase where your money is growing, and then there's the distribution phase where you start taking money out, and you have a lot more options for how that works.

SPEAKER_00 2:52

More options meaning what exactly?

SPEAKER_01 2:54

So with a CD, when the term ends, you basically get a check, principal plus interest, done. With a fixed annuity, you can take a lump sum, sure. But you can also set up systematic withdrawals over a number of years. Or uh, and and this is the part that really doesn't exist in the CD world, you can potentially set up income payments for the rest of your life.

SPEAKER_00 3:13

Wait, lifetime income from a fixed annuity? I feel like that's something people don't realize is even on the table?

SPEAKER_01 3:20

It depends on the contract. Not every fixed annuity automatically includes that. Some require you to add a writer. But yes, that option exists. And it's one of the reasons fixed annuities get used in retirement planning in a way that CDs really can't replicate.

SPEAKER_00 3:35

Okay, let's talk about taxes, because uh I think this is where the comparison gets really interesting, especially for people in Tennessee.

SPEAKER_01 3:44

Yeah, this is a big one. With a CD, the interest you earn is taxable as ordinary income in the year you earn it, even if you haven't touched the money, even if it's just sitting there compounding inside the CD.

SPEAKER_00 3:54

Which surprises people every single tax season.

SPEAKER_01 3:57

Every year. You get a 1099 INT from the bank, and suddenly you owe taxes on money you didn't actually take out. Fixed annuities work differently. They're tax deferred. You don't owe income tax on the earnings until you start taking withdrawals.

SPEAKER_00 4:10

So the interest is just compounding without getting chipped away by taxes every year?

SPEAKER_01 4:15

Exactly. Think of it like a garden hose with no leaks versus one with little holes all along it. Both are moving water, but one is losing some along the way. The tax deferral means more of your money is compounding over time.

SPEAKER_00 4:26

I like that. Now, Tennessee doesn't have a state income tax on interest income anymore, right? So does this tax deferral argument matter as much here? Aaron Ross Powell, Jr.

SPEAKER_01 4:36

Great question. And it's one that's specific to Tennessee residents. As of 2024, Tennessee doesn't tax wages or interest income at the state level. The old hall income tax on investment income was phased out. So you're right that the state tax piece is simpler here than it would be in, say, Georgia or North Carolina.

SPEAKER_00 4:53

Aaron Powell So the tax deferral advantage is really a federal income tax story for Tennesseans.

SPEAKER_01 4:59

Right. Federal taxes still apply. And depending on your tax bracket, deferring that income can be meaningful. But I always say, talk to a licensed tax professional about your specific situation. Because how much it matters really depends on your income picture.

SPEAKER_00 5:15

Fair. Okay. Let's talk about term lengths because I think this is another place where people assume they're comparing similar things.

SPEAKER_01 5:23

CDs tend to run shorter. You can find them for a few months, up to maybe five years. It's pretty unusual to see a CD term beyond 10 years. Fixed annuities, especially the type called um multi-year guaranteed annuity or my GA, those often run three, five, seven, even ten years.

SPEAKER_00 5:42

And my gas are popular in Tennessee specifically?

SPEAKER_01 5:45

Um they're popular everywhere, but yeah, they're they're widely used here. Amyga locks in a rate for a defined period, similar in concept to a CD, but you get that tax deferral benefit on top. So for someone who's thinking, I want something CD-like, but I want the tax treatment of an annuity. Amyga is often what comes up in that conversation.

SPEAKER_00 6:03

And the longer terms on annuities, does that translate to higher rates?

SPEAKER_01 6:08

Generally. Yes. Uh the reason is that um insurance companies can plan further into the future with those funds. When you commit to a seven-year annuity, the insurance company knows that money is going to be there for seven years. Uh that longer planning horizon typically allows them to offer more competitive rates than a bank can on a shorter-term CD.

SPEAKER_00 6:27

Although I want to push back slightly, it's not like annuity rates are always higher than CD rates across the board, right? It depends on the moment in time, the carrier, all of that.

SPEAKER_01 6:36

Aaron Powell You're absolutely right to push on that. Rates vary by carrier, by contract type, by what's happening in the broader interest rate environment. Uh the general pattern has historically favored annuities on longer terms, but you should always compare current rates side by side before making a decision. Don't assume one is always better.

SPEAKER_00 6:54

Which is exactly what my friend in Knoxville should be doing. Actually looking at the numbers right now, not just going off a general rule.

SPEAKER_01 7:02

Exactly. And that's where uh talking to a licensed agent is genuinely useful because they can pull current MoIGER rates and current CD rates and actually put them next to each other.

SPEAKER_00 7:11

Let's talk about fees, because I think this is where some people get nervous about annuities.

SPEAKER_01 7:16

The nervousness is sometimes warranted and sometimes not. For a straightforward fixed annuity, no riders, no add-ons, the fee picture can actually be pretty minimal. The main cost you're managing is the surrender charge if you pull money out early, which functions a bit like a CD's early withdrawal penalty.

SPEAKER_00 7:32

But if you start adding riders, that changes.

SPEAKER_01 7:35

It can, yeah. Riders are optional features you can attach to an annuity contract, things like a lifetime income writer or an enhanced death benefit, or sometimes a long-term care component. Those can add value, but they also typically add cost. So the the question is always does this feature actually serve my situation, or am I paying for something I don't need?

SPEAKER_00 7:55

And that's a conversation you need to have before you sign, not after.

SPEAKER_01 7:58

100%. Read the contract. Ask the agent to walk you through every charge. I've seen people surprised by fees they technically agreed to, but didn't fully understand at signing. That's avoidable.

SPEAKER_00 8:09

Okay, let's talk about protection because I think this this is a question a lot of people have, especially after everything that happened in 2008. How safe is the money?

SPEAKER_01 8:20

So this is where the different institutions thing really matters. CDs at FDIC insured banks are federally protected, up to $250,000 per depositor. Credit unions have similar coverage through the NCOSCF. That's a well-known federally backed protection.

SPEAKER_00 8:38

And annuities don't have that.

SPEAKER_01 8:39

Annuities are not FDIC insured. Correct. Their security comes from the financial strength of the insurance company that issued the contract. So the health of that insurer matters.

SPEAKER_00 8:51

Which sounds scarier than it maybe is?

SPEAKER_01 8:53

I'd say it's different rather than scarier. Insurance companies are heavily regulated and required to hold significant reserves. And Tennessee has a State Guarantee Association, the Tennessee Life and Health Insurance Guarantee Association, that provides a backstop for policyholders if an insurer becomes insolvent. It's not a limited protection, and the limits are different from FDIC coverage. But it's not like your money is just floating in the wind.

SPEAKER_00 9:16

So you'd want to ask a licensed agent about those specific limits before you commit.

SPEAKER_01 9:21

Definitely. And you'd want to look at the the financial strength ratings of the insurance company you're considering. That's publicly available information.

SPEAKER_00 9:28

Alright, so let's try to make this practical. Because I feel like we've covered a lot of ground, and someone listening might be thinking, okay, but which one is actually right for me?

SPEAKER_01 9:40

And uh the honest answer is it depends. I know that sounds like a dodge, but it really does come down to a few key questions. What's your timeline? How much flexibility do you need? And what's your tax situation? And what are you actually trying to accomplish with this money?

SPEAKER_00 9:57

Aaron Powell Let's walk through some scenarios. Picture someone who's fifty-eight, has forty thousand dollars they might need in two or three years for a home renovation. What's the instinct there?

SPEAKER_01 10:10

That sounds more like a CD situation to me. Short timeline, specific use in mind, needs liquidity. A fixed annuity with a seven-year surrender period would be a poor fit for that money. The simplicity and shorter terms of a CD actually serve that scenario well.

SPEAKER_00 10:26

Now flip it. Couple, both 65, just retired, they've got a hundred thousand dollars that's earmarked for retirement income. They don't need to touch it for at least five years, probably longer.

SPEAKER_01 10:38

Um that's a very different conversation. Tax deferral starts to matter more. The longer timeline opens up better rate options, and if they're thinking about income later in retirement, the payout flexibility of a fixed annuity, potentially including lifetime income options, is something a CD just can't offer. That's a situation where exploring a Miga or a fixed annuity with an income writer makes a lot of sense.

SPEAKER_00 11:01

And it's not necessarily either or, right? I've I've heard of people using both.

SPEAKER_01 11:05

That's actually pretty common. A lot of Tennessee retirees, uh, and I've seen this pattern in in Nashville, in Memphis, uh in uh Knoxville, they'll keep shorter-term savings in CDs for money they might need in the next year or two. And then they'll direct longer-term retirement funds into fixed annuities or my Js. It's a layered approach.

SPEAKER_00 11:25

Which makes sense. You're not putting all your eggs in one basket, and you're matching the product to the actual purpose of the money.

SPEAKER_01 11:33

Right. Um, the product should fit the job. A CD is a great tool for certain jobs. A fixed annuity is a great tool for different jobs. Picking the wrong one isn't just a missed opportunity. The army can actually cost you. Either in taxes you didn't need to pay, or in surrender charges because you needed the money back sooner than expected, or in lost growth because you were in a shorter term product when you had a longer horizon.

SPEAKER_00 11:54

That last one is interesting. Can you say more about that? The lost growth piece?

SPEAKER_01 11:59

Sure. Um, if you have money, you genuinely won't need for seven years, and you keep rolling it into one-year CDs because that feels safer or simpler. You might be leaving rate on the table. Longer-term fixed annuities have historically offered higher rates for that longer commitment. And you're also losing the compounding benefit of tax deferral every year you're in the CD paying taxes on interest you haven't even withdrawn.

SPEAKER_00 12:23

So the CD feels simpler, but it might actually be the more expensive choice over a long horizon.

SPEAKER_01 12:29

For some people, in some situations, yes. Uh, not universally, but it's a real possibility that's worth running the numbers on.

SPEAKER_00 12:35

And I want to be clear, we're not saying annuities are better than CDs. We're saying they're different. And the right answer depends on your situation.

SPEAKER_01 12:45

That's exactly right. And frankly, neither of us can tell you which one is right for you specifically. That's a conversation for a licensed insurance agent who knows your full financial picture.

SPEAKER_00 12:54

Going back to my friend in Knoxville, I actually told her to do exactly that. Get a licensed agent to pull current MIGA rates and current CD rates, put them side by side, and then talk through her actual timeline and what she needs the money for.

SPEAKER_01 13:09

That's exactly the right move. Because rates change, and what looked like a clear winner six months ago might look different today. You want current numbers, not general rules.

SPEAKER_00 13:19

One thing I want to circle back to is the customization piece, because I think people either love it or it overwhelms them.

SPEAKER_01 13:26

It can definitely be overwhelming. A CD has uh essentially no customization. You you pick the term, you pick the amount, you're done. An annuity can have riders for inflation adjustments, death benefits, long-term care components, and you can sometimes choose how you're paying premiums, whether that's a lump sum or periodic contributions.

SPEAKER_00 13:47

Which sounds great until you're sitting there with a 20-page contract and a highlighter at 11 o'clock at night.

SPEAKER_01 13:53

Ha, I've been there. And that's not a reason to avoid annuities, but it is a reason to work with someone who's read a lot of these contracts and can explain what you're actually signing. The flexibility is genuinely valuable if you use it. If you're adding writers, you don't need you're just paying for complexity.

SPEAKER_00 14:08

So the checklist for someone trying to decide, what are the real questions they should be asking themselves?

SPEAKER_01 14:14

I'd start with timeline. Do you need this money in the next few years? Or is this genuinely long-term retirement money? That alone narrows it down a lot. Then, how important is tax deferral to you right now? If you're in a higher federal tax bracket and you're paying taxes on CD interest every year, that adds up.

SPEAKER_00 14:31

And then payout flexibility. Do you care how the money comes back to you, or do you just want a lump sum at the end?

SPEAKER_01 14:38

Exactly. If you want the option of lifetime income down the road, a CD simply doesn't offer that. And finally, how much do you value simplicity? If the idea of reading an insurance contract makes you want to take a nap, a CD might genuinely be the better fit for your temperament, even if the numbers favor an annuity on paper.

SPEAKER_00 14:55

That's actually a real consideration. People underestimate how much the will I actually understand this and stick with it factor matters.

SPEAKER_01 15:04

It matters a lot. The best financial product is the one you understand well enough to actually use correctly.

SPEAKER_00 15:09

All right, I think the big takeaway here is d these are not the same product wearing different outfits. They come from different institutions, they're regulated differently, they're taxed differently, they protect your money differently, and they pay you back differently.

SPEAKER_01 15:25

And the comparison that matters isn't abstract. It's specific to your timeline, your tax situation, and what you're actually trying to do with the money. Get current rates, understand the terms, and talk to a licensed agent before you commit to either one.

SPEAKER_00 15:38

Aaron Powell Especially in Tennessee, where the state tax picture is a little different than other states, which means the federal tax deferral question is really the one you need to focus on.

SPEAKER_01 15:51

Right. Tennessee residents have a relatively clean state tax picture on this, which is actually a nice position to be in. But federal taxes don't care where you live, so the deferral question still has real teeth.

SPEAKER_00 16:02

And for anyone who's in that situation, my friend was in money sitting in a savings account, not sure what to do with it, just start the conversation. You don't have to have it all figured out before you talk to someone.

SPEAKER_01 16:14

That's the best way to put it. You don't need to walk in knowing the answer. You need to walk in knowing your questions. And honestly, the questions we covered today are a pretty solid starting point.

SPEAKER_00 16:29

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

SPEAKER_01 16:31

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

SPEAKER_00 16:35

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

SPEAKER_01 16:40

We'll see you next time.