"When the Lights Go Out…Are You Ready?"
CDs AND DEFERRED ANNUITIES: WHICH ONE IS RIGHT FOR YOU?

L.R. Johnson & Associates, Inc.
info@lrj-associates.com

Given the impact of taxes, inflation, and longer life expectancies, today's decisions could dictate tomorrow's retirement lifestyle. Bank certificates of deposits (CDs) and deferred annuities are two popular vehicles that individuals have used to accumulate wealth. Both are highly effective tools with their own unique strengths and weaknesses. For that reason, it's important to choose the one that best meets your financial goals and objectives.

WHAT ARE THE RISKS & REWARDS?

CDs and deferred annuities are considered low-risk, conservative investments. CDs are usually issued by banks and, in most cases, insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor.

If the bank should happen to fail, the FDIC guarantees CDs up to this amount. CDs also offer a guaranteed rate of return for a specified period of time. The rate of return you receive varies depending upon current market conditions and the length of time until maturity.

Insurance companies issue deferred annuity contracts and, unlike CDs, they are not insured by the FDIC. Deferred annuities are backed in their entirety by the financial strength of the issuing insurance company. Because of this, you should make sure the issuing company is financially secure before you purchase a deferred annuity.

Deferred annuity rates are sometimes higher because they are designed to encourage people to leave more on deposit for the long term due to the tax-deferred feature. A guaranteed interest rate is usually locked in for an initial period, ranging from one to three years. After the initial guarantee period, rates may be adjusted periodically. As an added advantage, most deferred annuities offer a minimum guaranteed interest rate that extends beyond the initial period.

Regardless of what happens in the market, the annuity will pay at least the minimum guaranteed interest rate established at the time of purchase.

WHEN DO YOU WANT TO PAY TAXES?

Current tax laws treat the interest earnings of CDs and deferred annuities quite differently. If taxes are a concern, a deferred annuity may prove to be a better option for several reasons:

o Earnings on CDs are taxable in the year the interest is earned. Also, you do not necessarily withdraw the earnings from the CD to pay the taxable amount.

Rather, you usually pay the tax out of current income or out of withholding from other income sources. This reduces your spend able income today and may

reduce it in the future when needed most.

o With deferred annuities; taxes on earnings are deferred until the earnings are withdrawn. This allows more of your money to work harder and gives you a measure of control over when you pay taxes and how much you pay. Your money earns interest on your principal, interest on your interest, and interest on the money that you would ordinarily pay in current income taxes. This tax deferral feature is one of the greatest advantages of deferred annuities.

o In addition, the tax-deferred earnings are not used in the calculation to determine the current income taxes due on your Social Security benefits. But with

CDs, interest earnings are used in the calculation to determine the tax on your Social Security benefits. As much as 85% of your Social Security benefits

could end up subject to taxation, depending on your income level.

WHAT IS YOUR INVESTMENT HORIZON?

When deciding between a CD and a deferred annuity, the time you have set aside to save for a specific goal is a key factor. This is your investment horizon. In the short-term, a CD may prove to be the better choice because you can select a maturity date that can be as short as one month or as long as several years. Keep in mind that if you need access to funds prior to the maturity date, you may pay an interest penalty ranging from thirty days to six months' interest.

To avoid this potential pitfall you can invest in several CDs with staggered maturity dates. If you are taking a long-term approach, a deferred annuity may be more attractive. The ability to compound earnings on a tax-deferred basis could help you accumulate assets for retirement.

And, should you need additional income, most insurance companies provide you with the ability to access the accumulated cash value in the annuity. Some companies will allow you to withdraw a portion of your deferred annuity's account value, usually 10% annually, without a company imposed surrender charge. Withdrawals can often be made in response to a one-time cash need or set up systematically to respond to a continuous need. Withdrawals from the earnings portion of a deferred annuity are taxable and, if you are under age 59 1/2, these earnings may be subject to a 10% tax penalty in addition to your regular taxes.

As you can see, CDs and deferred annuities are different. In some instances, it may be beneficial to allocate a portion of funds to a CD to meet short-term needs and a portion to a deferred annuity for the long term. Ultimately, the decision depends upon your individual goals and objectives.

For more information on annuities or other financial products offered by
L. R. Johnson and Associates, Inc. and its subsidiaries, please visit their website
www.lrj-associates.com and email Ronco Johnson at info@lrj-associates.com or
call us at 770-321-1337 to schedule one on one consultation.