Would it ever be a good idea to change from a traditional IRA CD to a IRA Fixed Annuity?
As with any investment, the questions to ask yourself are the same.- What are your goals?- What is your risk tolerance?- What is your time horizon?- What is the range of expected returns?- What are the fees?Without knowing those, it's very hard to give advice. It might be the case that neither a CD nor an annuity is appropriate for your IRA!Now some general facts.IRA CDs are issued by banks. They typically have a consistently low rate of return, unless you go out-of-state and bank by mail. The bank uses your money to make loans. It is FDIC-insured. There's a penalty for early withdrawal, which may increase as time goes on.IRA Fixed Annuities are issued by insurance companies. They have a higher rate of return, because there's no FDIC (government) insurance; the money is backed only by the financial strength of the insurance company (if a large enough disaster hits, and the insurance co can't pay it off, you lose). Your money is not making loans; instead it is being used to pay claims to policyholders. The increase in the annuity value comes from premiums paid by policyholders.Annuities are generally sold on commisison. That may influence the amount of persuasion the agent uses. Keep in mind that there may be several different rates possible that your money will earn, and it may be a complicated procedure to determine which rate in effect. ["Bonus rate in effect for year 1, fixed rate in effect years 2-5, for years beyond 5 you get the higher of the market rate or the guaranteed rate"]Annuities generally have very high fees if you want to get out early. The early surrender penalty decreases as time goes on.The Internet has made it easy to shop around for CDs and also for fixed annuities. Seewww.bankrate.comandwww.annuity.com -- you may be able to do much better than what your bank offers.
Thanks Jrr7 for responding to my question. I guess I should explain that I am an employee at a Financial Institution who is licensed to sell annuities. I have seen employees switch matured IRA CDS to 5 yr annuities and I guess I just can't see the rationale for this. I also have a Series 6 license but can't use it here yet. Usually these customers are older people over 59 1/2. I realize that the one advantage would be the possible income for life option that an annuity could provide. As with any investment, all the questions you raised should always be asked before any investment is presented. I was just wondering out loud if this is a sound business practice.(the IRA CD to Annuity) Of course if these very same customers had regular CDs that they have been rolling over year after year and never taking any interest and are in a high tax bracket, the annuity may be just what they need.
The main thing the customer gives up is FDIC insurance. In return the customer should get a higher yield and some tax deferral.What do you mean by "sound"? I'm sure that the bank would rather the capital be in their insurance business than in their deposit business.
Hi, Yes, I'm sure the bank would rather have the money in the insurance area than the deposit area as well. I guess by "sound" I meant "right for the customer". Thanks for taking the time to respond.....
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