Annuity Vs. Other Guaranteed Income Investments

by Amanda McMullen, studioD

If you want to invest your money but aren't comfortable with the risk of losing it, you may consider a guaranteed income investment. The most common guaranteed income investments are annuities, which are guaranteed by the insurance companies who issue them; securities issued by the U.S. Treasury, which are backed by the full faith and credit of the federal government; and certificates of deposit, savings accounts and and some money market funds, which are insured by the federal government. One of the most popular of these investments is the annuity, which is notably different from the other options.

About Annuities

An annuity is an investment product that pays out a stream of income at some predetermined date in the future. Investors may choose to receive payments for the rest of their lives or for a set number of years. Annuities earn interest at either fixed or variable rates, depending on the type of annuity. Many investors choose annuities because they promise at least a minimum amount of income at maturity.

Annuities Vs. Treasury Securities

Treasury securities are those issued and guaranteed by the federal government. The primary difference between Treasury securities and annuities is their flexibility. If you invest in a Treasury security, such as a bond, you may sell it at any time without incurring a penalty. Conversely, you may be charged a hefty fee by the issuing company if you cash in an annuity in its early years, and you may face IRS tax penalties if you withdraw annuity earnings before you turn 59 1/2. Another difference between Treasury securities and annuities is the payment schedule. While Treasury securities pay regular interest until they mature, annuities make no payments until after maturity.

Annuities Vs. Certificates of Deposit

A certificate of deposit is an account in which the investor's funds accumulate interest at a fixed rate for a specified period of time. Most CDs carry terms ranging from three months to five years. The Federal Deposit Insurance Corporation insures bank-issued CDs with balances of up to $250,000, but it doesn't insure annuities. On the other hand, most states insure annuities issued by licensed insurance companies. Annuities typically pay higher interest rates than CDs. The interest you earn from an annuity is tax-deferred, while the interest earned on a CD is not unless you hold the CD within a qualified retirement account.

Annuities Vs. Savings Accounts

A savings account is an account you open with a bank or a credit union. After you deposit at least a minimum amount of money, the bank adds interest to the account at a specified rate. One primary difference between an annuity and a savings account is the tax benefit. While the interest you earn on an annuity is tax-deferred, you must pay taxes on interest earned in a savings account during the year it is earned. Another difference between an annuity and a savings account is that an annuity penalizes early withdrawals, while a savings account does not. Money market funds operate in much the same way a savings account does, although most institutions give you easier access to your money in a money market than to money held in a savings account. Money market accounts may be covered by FDIC insurance, or they may not -- check with the institution that holds the account to confirm its status.

About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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