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Medallion Financial Group

What are CDs and Annuities?

I’m always suspicious of those magazine ads selling socks or sweatshirts that say “one size fits all.”

I’m a pretty big guy, with 50-inch shoulders, that still plays rugby with “The Old Boys Club.” However, my brother is tall and a little on the thin side.

The point is, there’s no way the two of us can fit into the same size of anything. Yet I hear this type of thinking all the time in my financial planning practice.

‘My cousin got this stock market fund, so that’s what I’m going to buy as well’ or ‘I’ve heard CDs are a bad place to put your money’ or ‘I heard you should never buy a fixed annuity’.

The truth is, long-term savings options are like clothes. One size just doesn’t ‘fit all.’

Where to Put My Money?

Dear Medallion Group,

I am 62 years old and I have almost $100,000 to invest. I am very financially conservative and do not want my money in the stock market. I can live off of my pensions, so unless something unexpected comes up, like needing a new car transmission or having to go to a nursing home, I probably won’t need the money. I’d really like it all to go to my kids. My banker suggested a CD, while my insurance agent suggested a tax-deferred annuity. What do I need to know?

Dazed and Confused, Howard County, Maryland

Dear Dazed and Confused,

You stated that you probably won’t need the $100,000 for the rest of your life, except in case of an emergency or unexpected expense. Otherwise, you want it all to go to your kids.

We typically recommend that retirees keep enough to cover three months of expenses for emergencies, like that broken transmission or a leaky roof.

In that case you could calculate three months of bills and set that amount aside in a savings account. Just keep it in your bank. After you’ve done that, the rest can be eligible for long-term savings.

Long-Term Savings: CDs and Annuities

First, let’s discuss the advantages and disadvantages of two popular long-term savings vehicles: CDs and tax-deferred fixed annuities. Then we can look at some specifics about the two options.



  • CDs are insured by the FDIC, just like any bank account under $100,000. But unlike bank accounts, the maximum insured amount is $250,000. In other words, your principal isn’t going anywhere, as long as it is under $250,000.
  • They have very low minimum initial deposit amounts and are easy to set up and you don’t need to deposit all your money to start one. You can usually just walk into your bank and ask about CDs.
  • CDs have a steady rate throughout the life of the account, meaning that the rate of return will not change if the market goes up or down.


  • CD interest counts as taxable income. So by having your money in a CD, you won’t be reducing your tax burden. If you keep it in there long enough to collect significant interest, you will see your taxable income go up.
  • If your money is in a CD, you’ll want to keep it there for a while before taking it out. The reason for this is twofold.
    1. First off, the interest rates, although typically better than a savings account, are not high. The money will need to be there for a while before it actually grows.
    2. Second, if you take money out early, you’ll be subject to early withdrawal fees, which will end up costing you a substantial chunk of the interest you earned.
  • The longer the term, the higher the interest rate, so if you don’t want your money locked up for a while, a CD may not be the best choice for you.
  • Inflation can get to it. The interest you earn may not end up meaning much, because if inflation rises, your money will lose purchasing power if the CD rates fall behind inflation.

Fixed Annuities


  • Fixed Annuities are tax-deferred, so the interest you earn will not be taxed while it is growing in the account. Once you start receiving installments from the annuity, however, it will be taxed as income.
  • If the market goes down, you can count on a fixed interest rate. But if the market goes up, you don’t get a benefit from it out of the annuity.
  • In the event of your death, your children (if they are named the beneficiaries) can inherit the annuity, which would then give them the remaining money in the account, like life insurance. The money will be taxed as income, but this will avoid putting time and money into probate.
  • Fixed annuities are often a reliable and conservative option for investing.


  • While most annuities allow a certain amount of withdrawal, you can get hit with some heavy surrender fees if you take money out early, and the money will be taxed as well. If you put money into an annuity, you should be okay with it being in there for a long time.
  • Payments may not keep pace with inflation. The rates and payments are going to stay the same the whole time. So if the dollar inflates, your interest is not going to be any higher.
  • While some annuities have guaranteed rates throughout the term of your contract, others have a fixed rate for a certain amount of time, and then they will change. If you don’t like the new rate and choose to take money out, you will be hit with the surrender fees.
  • The guarantee of an annuity depends on the ability of the issuer to pay, so you may end up being owed some money if the company has too many people collecting money from annuities.

Some Specifics

So now you have a lot of information about the advantages and disadvantages of annuities and CDs. But what are some quick facts you can remember?


  1. CDs are taxable income.
  2. If you withdraw from a CD early you’ll incur an early withdrawal penalty.
  3. CDs will probably have to go through probate and only the interest will be taxed as income.
  4. CDs are like savings accounts with some more interest. This comparison is GREATLY simplified.
  5. A CD will be available after a set period of time.
  6. CDs typically have much lower interest and deposit requirement.
  7. CDs are insured by the FDIC up to $250,000.
  8. CDs have rates for a certain period until they roll over to a new rate, so it generally increases with extended periods of time.


  1. Money in an annuity is not taxable until you get it back (tax-deferred).
  2. Some annuities let you withdraw annual amounts penalty-free. Other annuities will hit you with an early withdrawal fee AND 10% tax.
  3. Annuities can be inherited by your children but will be counted as taxable income.
  4. Annuities are backed up by each state’s guarantee funds.
  5. Interest rates can be changed (dropped) in annuities by the company after a certain amount of time.
  6. Since an annuity is a retirement account, you may have to leave the money in there for a longer period of time.

In the end…

Really, both fixed annuities and CDs are considered conservative, reliable ways to hold and grow your money. It takes a case-by-case assessment to determine what will be better for you, and it’s definitely worth talking to a certified financial planner.

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The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply.

At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.

Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.

We strive to exceed client’s expectations – because we have high expectations of ourselves.

post icon in Retirement by Medallion Group Oct 26, 2015