When planning for retirement, the options given to you can be overwhelming. The variety of investment types built for retirement can be complicated and deciding on the one or choosing more than one can be difficult to tackle. Often, a combination of different retirement investments will be the most effective for your nest egg. Annuities have very distinct differences from IRAs, 401kS and CDs, though there are key places where they overlap.
Annuity vs IRA
With annuities and IRAs, you have your investment dispersed among a variety of sub-accounts that allow you a lot of potential for consistent gain. The difference lies in the taxes, payout and cost. The taxes on an IRA tend to be more manageable, as annuities remain tax-free only as long as the account is deferred. With a traditional IRA, your taxes will vary and you can often deduct your initial investment from your taxes. IRAs also tend to be less costly, as they are only handled through your place of employment as opposed to an insurance company.
But IRAs have a big limitation that annuities lack. With an IRA, you have a $2000 limit on how much you can invest per year. An annuity has no cap on how much money you can put towards your retirement at once. If you are a person who wants to gain money faster by making a larger initial investment or investment per year, an annuity will be the better choice. And, an annuity has a insurance wrapper that an IRA lacks, giving you a death benefit that is no less than the initial investment in the annuity.
Annuity vs 401k
Annuities and 401ks are very popular approaches to retirement. The tax benefits and the rules for withdrawing from accounts intersect, but there are crucial differences that will be deciding factors for investors.
One of the biggest limitations to a 401k is the lack of availability to those not already employed with a company that offers it and you can only invest in your 401k for as long as you work for the company that you got it through. Like an IRA, you will have a cap on how much you can invest into a 401k, as well. An annuity is available to anyone and can have investments added at any time without a limit on the amount.
While you can deduct your investment into a 401k from your taxes for the year, which you cannot do with an annuity, your entire withdrawal on a 401k is taxable. With an annuity, only the investment gains will be taxed.
Annuity vs CD
CDs and annuities offer similar terms, but have a big difference in their potential earnings and overall security. A big variable between an annuity and a CD is the type of insurance tied to them. A CD is covered by an FDIC and is insured up to $250,000, so regardless of the bank’s successes and failures, up to that amount will be protected. An annuity still, of course, has insurance, but that insurance relies on the company.
But annuities often times have a much higher interest. CDs in the current market tend to offer less than one percent in interest, whereas an annuity’s interest rates start out higher and, depending on the annuity, can gain higher annuity rates as subaccounts gain over time, leading to an overall higher average interest for the investment.
Annuities also have that gain of being tax-deferred until you start withdrawing money, which bank CDs lack. Annuities have another boon of allowing a small amount of withdrawal without charging a surrender penalty where a CD will likely charge you a small penalty.