Interest rates have been low for a long time and it doesn’t look like they will get back to the “good old days” any time soon. Like most of my clients, you may be wondering if there is anything better out there for your money. A multi-year guarantee fixed annuity might be right for you. Typical interest rates are 1.75% for 3 years and 2.5% for 5 years.
Much like a Certificate of Deposit, you will earn a guaranteed fixed rate of interest for a specified length of time. At the end of the period, you will have a 30 day window to decide how you would like to proceed. What are the differences? Interest on a CD is taxed as it is earned – therefore you get a 1099-INT every year to claim on your tax return. Interest earned in the annuity is tax deferred, meaning you do not get a 1099-R unless you take a distribution. Another difference is that most CD’s are FDIC insured. Annuities are not – they are backed by the claims paying ability of the insurance company. In Illinois, there is the IL Life and Health Insurance Guaranty Association which offers protection up to $250,000 cash value in an annuity if the insurance company becomes insolvent.
With tax deferral of the interest earned in an annuity, there may be tax benefits by removing interest or dividends that are currently reported on your tax return. An tax analysis would show if there are tax savings in your specific situation.
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