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%:
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| 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.