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Annuities Outperform CDs Even at the Same Rate

Scaling retirement can be akin to climbing a mountain with several crests. Just when you think you’ve reached the final cliff, another one appears on the horizon, mocking you for believing you had reached the summit.

So it goes with retirement savings, where even an abundant amount of assets in IRAs and 401(k)s may not actually be enough for retirement. In fact, “tax-qualified contributions alone will probably not give you what you’ll need for retirement,” said Ken Nuss, CEO of AnnuityAdvantage in Medford, Ore.

Nuss advocates a combo platter of sorts in retirement, with an accent on tax deferral. After all, tax deferral is a powerful tool in saving enough to meet your retirement goals. That’s why tax laws encourage people to use both retirement accounts and annuities.

“Retirement accounts are great, but they have strict annual contribution limits,” Nuss said. “Because nonqualified annuities don’t, they can play a key role in achieving your retirement goals.”

Consider a fixed annuity paying 3 percent — a rate that’s readily available today — versus a certificate of deposit paying the same rate.

“Assume the buyer’s combined federal/state income tax rate is 25 percent, a typical figure,” Nuss said. “After 10 years, a $100,000 premium payment made to a tax-deferred annuity will grow to $134,392. But the CD will grow only to $124,920, assuming income taxes are withdrawn and paid each year.”

That is a $9,472 advantage for the annuity owner when compared to the bank CD. After 20 years, the annuity advantage increases to $24,560, Nuss noted.


Delayed Tax Bills

But it’s really in the tax deferral component of annuities where retirement savings benefits kick in.

“The CD owner pays taxes on the interest annually,” Nuss said. “The annuity owner will owe tax on accumulated interest when it’s withdrawn.

“Withdrawals, however, can be put off until the owner needs the money and may be in a lower tax bracket. There’s also the option of eventually annuitizing the money, which spreads out the tax burden over one’s lifetime.”

Is Nuss on the mark with his assessment, and can tax deferral play a bigger role than advisors might think in retirement planning? Some retirement experts think so, but as always, there are caveats.

“I think tax deferral is a primary reason consumers are purchasing annuity contracts, but there are several others as well,” said Adam Hyers, an independent annuity broker with Ohio-based Hyers and Associates. “Many of my clients are simply looking for reasonable three-to-five-year returns with no risk to their principal.”

Even with three Federal Reserve rate hikes in the past eight months, banks are offering very low rates on money market accounts and CDs. So a five-year annuity yielding 3 percent or above looks very attractive to conservative-minded investors, Hyers said.

“In some cases, my clients are withdrawing their monthly interest for living expenses and are not concerned about the tax deferral aspect at all,” he said.

Others say there are many different accumulation tactics available today from annuity providers.

“In order to identify if tax deferral is a value, you need to understand how the annuity is built and what the overall fees amount to,” said Mitchell McCann, managing director at McCann Wathen Retirement Strategies in Bloomfield Hills, Mich.

Retirement savers and their advisors should check out variable annuity and fixed annuity returns since interest rates bottomed out, starting in 2012.

“I think you’ll find almost no good answer to tax deferral as a sales point when fees eat up more than 30 percent of the gross potential return,” he said. “That’s assuming investors invest properly, which is a difficult thing to expect.”


Not Convinced

Still other money managers aren’t convinced that annuities offer the best tax-deferral outcomes, but that doesn’t mean they aren’t useful for retirement savers.

“Although annuities do not necessarily offer more tax-deferral benefits than other tax-deferral products, such as traditional IRAs and 401(k)s, retirees find other features and benefits of annuities attractive,” said Jack Shinn, president of J Shinn & Associates in Glen Rock, N.J.

“Some of these features would be the guarantee of premiums against market loss, certain riders such as living benefit riders, and in the case of index annuities, the use of a zero floor whereby accounts stop losing value at zero.”

These are benefits not found in other retirement tax-deferral products, Shinn said.

“In spite of the fact that in many cases, annuities have more internal costs than IRAs or 401(k)s, clients still use them because of these other benefits,” he added.


Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books The 401(k) Millionaire and CNBC Creating Wealth: An Investor’s Guide to Decoding the Market. He’s a regular contributor to major media business platforms, including CBS News,, and Bloomberg. Brian may be contacted at [email protected]

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