Is A Fixed Annuity As Safe As A CD?

stanley | Aug 8, 2020 | 25 posts since 2019

Mutual of Omaha is offering a Fixed Annuity which pays 2.25% for a five-year investment (rate varies by state and age). You're able to withdraw a certain percentage each year penalty-free.

Is this investment comparable to a CD in terms of safety? It's not insured by FDIC but it does have protection up to 250k from a State Guaranteed fund.

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Answers

CuriousDave | Aug 8, 2020 | 233 posts since 2018

It is not as safe as a CD in the sense that, unlike the federal government, states do not have the legal power to "print" money. Under normal circumstances most of us would not be that much concerned, but nowadays who knows what the longer term economic and financial fallout will be state by state because of COVID-19. It may also be wise to ask for a sample written contract before committing to this type of offering, to see the fine print. Is the 2.25% the APY or simple interest? Aside from the "penalty-free" issue are there any charges that erode the principal investment, either at inception or upon surrender? Also, for those considering investing the state-insured max of $250K for 5 years and then cashing out, let's realize that the appreciation that accumulates in annuity contracts is tax deferred until withdrawn, so we are looking at somewhere between $28K - $30K of accumulated earnings (depending on what the 2.25% really means) that will come out at the back end as part of the lump sum withdrawal. For some that can mean a higher tax bracket, so a professional may need to be consulted to project the tax effects in the year the 5 year term ends - and projecting now could be difficult if, for instance, the Democrats achieve a clean sweep in November and change the tax rates next year.

Choice | Aug 8, 2020 | 937 posts since 2020

Some annuity issuers will attempt to assert statements (by them) external to contract are part of the deal, e.g. cover letter. Be careful

CalBear49 | Sep 8, 2020 | 26 posts since 2015

The health of insurance companies are rated by independent companies such as AM BEST (http://www.ambest.com). My financial consultant says that the minimum health grade for an insurance company that he would recommend would be a solid "A", not even an "A-" (A-minus). FYI.

CalBear49 | Sep 8, 2020 | 26 posts since 2015

Some annuities say that they will let you withdraw 10% of the balance per year "without penalty". However, if you exercise this option your entire interest on the full balance for the year becomes taxable that year, not just the interest on the 10% that you withdrew "without penalty". The interest is no longer deferred to the maturity date. This approach softens the balloon tax impact at maturity if you make your 10% annual withdrawals. Check the fine print and check with your tax consultant.

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