Recently, we sent out a Fixed Annuity (FA) mailer to our 18-month Certificate of Deposit (CD) customers. We did this in hopes of offering our customers an alternative option in the event that their Certificate of Deposit is nearing maturity.  With that being said, we thought there might be other folks out there (including those who received the mailer) that could be asking themselves, “What’s the difference and more importantly, which one is the most beneficial for me?”

To answer this question, we went to our very own Marylove Moy, Program Director of 1st Mariner Financial Services, to see if she could shed some light on that matter.

The Experienced Financial Advisor’s Opinion.

Both (CDs) and (FAs) are considered savings vehicles, normally used to accumulate wealth: but there are key differences between the two options.

Safety of Principal

Both are considered appropriate choices for the conservative investor. CDs are usually issued by banks and therefore offer the FDIC backing up to $250,000. Annuities, on the other hand, are issued by insurance companies; they are backed by the financial strength of the issuing company (regardless of dollar amount). Ratings agencies, such as S&P and Moody’s, provide critical information in assessing a company’s financial situation.

Interest Rate

As a rule, CDs guarantee a rate of return for a period of time; many factors determine this rate. Fixed annuities can offer either a fixed rate for a predetermined contract term or a rate that adjusts periodically during the term. Annuities – unlike cds – offer a minimum floor interest rate that is guaranteed irrespective of market conditions.

Tax Considerations

For those individuals concerned with minimizing taxes, a fixed annuity is an attractive option. Interest on a FA accrues on a tax-deferred basis; an investor is taxed on this interest only to the extent that it is withdrawn from the contract. This fact can – in the appropriate circumstance – reduce the taxes paid on an individual’s Social Security benefits.  On the other hand, the investor faces a 10% penalty on the interest withdrawn if he/she is under the age of 59 ½.  If you have tax related questions, please consult your tax advisor.

Liquidity/Investment-term horizon

As a rule, a CD is the preferred option for those investors with a short term investment time frame. If an investor redeems a CD early, he/she is normally subject to penalties.

Fixed annuities usually offer the investor access to interest earned on the contract or a certain percentage of the contract value. It is critical for the investor to understand that interest withdrawn from an annuity contract is taxable at this point. Additionally, should the investor surrender the contract before its maturity date, surrender charges can apply (depending on the fixed annuity type, these surrender charges may or may not invade the contract principal).

Estate Considerations

Proceeds from a fixed annuity bypass the probate process; that is to say they go directly to the beneficiary once the contract is surrendered with proper documentation. The proceeds are not delayed by the court processing of the estate.

Program Director
1st Mariner Financial Services

Still confused?

No worries.  Marylove and her team of Financial Advisor’s would be happy to help answer any questions or concerns that you still have.  Feel free to contact our Financial Services Department or call us at 410-558-4200.

Please contact your financial advisor. Securities offered by 1st Mariner Financial Services, and Investment Advisors are registered with UVEST Financial Services, member FINRA. UVEST is independent of any financial institution. Securities (1) are not deposits of this institution; (2) are not insured or guaranteed by the FDIC or any other governmental agency; (3) are not obligations of, or guaranteed by, any financial institution; and (4) involve investment risks, including the potential for fluctations in investment return and the potential loss of principal.

Do you really want to read about tax planning????

Ummm…

The answer is a big YES because it can help you and your family’s financial situation.

Goal number one in tax planning is to reduce your taxable income or adjusted gross income (AGI). Aside from the obvious fact that the easiest way to reduce your income is to earn less (duh!), the best way to reduce your AGI is to contribute to a (401k) or whatever retirement plan is offered to you by your employer. Your contribution reduces your wages and therefore lowers your tax bill.

Don’t tell me that you can’t afford to increase your contribution rate to your retirement plan. Try bringing in your lunch a few days a week or pass on a couple of lattes; those dollars add up. Better yet, try signing up for a Personal Finance Manager (PFM) such as Mariner360 and find out where your money REALLY goes. I’ll bet you’ll be able to spot a few places where you are spending unnecessary dollars that could be going towards your retirement.

Talk about killing two birds with one stone: reducing your tax bill and saving for your retirement!

Now that is a plan.

As always, please consult your tax advisor when when completing your tax return.

According to the Super Bowl theory, stocks will rise this year no matter which team wins. This is because both the Green Bay Packers and the Pittsburgh Steelers trace their roots to the original National Football league. And this theory postulates that when a team from the old NFL wins, the stock market tends to go up.

Although Green Bay appears to be the early favorite to win the game, investors might be better off if Pittsburgh becomes the 2010 Super Bowl champs. The Dow Jones Industrial Average has risen an average of 14% in the three years that the Packers won, while rising an average of 18.4% in the six years that the Steelers were victorious. This is a true dilemma for Baltimore Ravens fans.

Only time will tell…but…maybe time to test those toes in the equity markets!!!!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee for future result. All indices are unmanaged an cannot be invested into directly.