When it comes to working on your financial health, knowing what a fixed annuity is can put more of your own money in your pocket over time. A fixed annuity lets you accumulate assets at a fixed rate. With one of these annuities, you have the power to invest savings across a time period typically lasting three to 10 years. The greatest benefit is that your money does not get taxed until your withdraw it. Here are three things to know about this type of savings.
1. Fixed Annuity vs. CD
Certificates of deposit (CDs) are similar to fixed deferred annuities in that they are low-risk tools you can use to earn interest on savings. Some key differences include that fixed annuities are sold by insurance companies while CDs come from banks. Additionally, fixed annuities have a minimum term of three years and a maximum of 10 years, whereas CDs have terms as low as three months and maxing out at five years.
Perhaps the greatest advantage of a fixed annuity is that taxes on any interest you gain remains deferred until you actually withdraw the money, as opposed to a CD where the interest is taxable as you earn it each year.
2. Pros of a Fixed Annuity
A fixed annuity grows at a guaranteed rate for the duration of your contract. As far as the government is concerned, it’s also a savings vehicle that receives similar tax considerations to an IRA. Additionally, these annuities don’t carry any associated market risk and the principal is protected for the whole contract. Fixed annuities come with peace of mind thanks to their simplicity. Anyone can understand the terms and know when the money will be available as well as what the return will be over the life of the contract.
3. Who a Fixed Annuity Is For
A fixed annuity can be a great option for most people, but some factors make certain candidates more suitable than others. For example, people who plan on accessing their money within three years of signing the contract or before turning 59 and a half might want to steer clear of this product. However, others who have maxed out their IRA or 401k, want more certainty in their investment, have other assets at a higher risk level or want to have a bit more liquidity in their investment will find that a fixed annuity is a great option.