4% Annuities Versus 3% Bank CDs – Doing The Math

4% Annuities Versus 3% Bank CDs – Doing The Math

Top Bank CDs are currently at 3% for 5 years.  Fixed guaranteed annuities are now at 4% for the same 5-year duration.  The higher rate alone would be enough for most clients to make a move – but have you looked at what the power of tax deferral would do to add to this argument?

The comparison below assumes a $100,000 non-qualified deposit, with an assumed tax bracket of 35%:

.tg {border-collapse:collapse;border-spacing:0;}
.tg td{font-family:Arial, sans-serif;font-size:14px;padding:10px 5px;border-style:solid;border-width:1px;overflow:hidden;word-break:normal;border-color:black;}
.tg th{font-family:Arial, sans-serif;font-size:14px;font-weight:normal;padding:10px 5px;border-style:solid;border-width:1px;overflow:hidden;word-break:normal;border-color:black;}
.tg .tg-rbd6{font-weight:bold;background-color:#fcff2f;border-color:#000000;text-align:center}
.tg .tg-obcv{border-color:#000000;text-align:center}
.tg .tg-sgu4{font-weight:bold;background-color:#fe0000;border-color:#000000;text-align:center}
.tg .tg-yes0{font-weight:bold;border-color:#000000;text-align:center}
.tg .tg-adzg{font-weight:bold;background-color:#67fd9a;border-color:#000000;text-align:center}

BANK CD
YEAR DEPOSIT RATE INTEREST EARNED AFTER 35% TAX YEAR END VALUE
1 $100,000.00 3% $3,000.00 $1,950.00 $101,950.00
2   3% $3,058.50 $1,988.03 $103,938.03
3   3% $3,118.14 $2,026.79 $105,964.82
4   3% $3,178.94 $2,066.31 $108,031.13
5   3% $3,240.93 $2,106.61 $110,137.74
 
ANNUITY
YEAR DEPOSIT RATE INTEREST EARNED TAX DEFERRED INTEREST YEAR END VALUE
1 $100,000.00 4% $4,000.00 $4,000.00 $104,000.00
2   4% $4,160.00 $4,000.00 $108,160.00
3   4% $4,326.40 $4,000.00 $112,486.40
4   4% $4,499.46 $4,000.00 $116,985.86
5   4% $4,679.43 $4,000.00 $121,665.29

After 5 years, the client earns over 100% more in interest.

After 5 years, they can maintain the deferral by continuing in the same contract, or by transferring the assets via a 1035 exchange into another annuity which, likely, should be paying a higher rate of interest at that time.