Annuities versus Savings Bonds

Tuesday, August 24th, 2004
Categorized as: Savings Bonds and competitive investments

Annuities are a type of investment that has the same tax-deferment feature as Savings Bonds and traditional IRAs. This commonality means that those who sell annuities often target those who own Savings Bonds as potential customers.

In addition to the similarities, however, you need to understand the differences. The main one is that Savings Bonds have no fees or commissions. They do have a three-month interest penalty if you withdraw your money within five years.

When you invest in an annuities, on the other hand, a portion of your money goes to pay a sales commission, underwriting fees, and annual fund management fees. If you withdraw your money before you are 59 1/2, there can be a 10% IRS penalty, as well as a fee to the annuity company.

Moreover, with Savings Bonds your investment is guaranteed by the U.S. Treasury. With an annuity the guarantee is only as good as the company that gives it to you.

So be careful when the annuity salesman pays a visit. “You make a fortune on the headline and then the fine print takes it all back,” is how insider jokes summarize annuities.

We’ve recently come across two articles you should read if you are considering investing in an annuity.

One Faulty Investment, by Jane Bryant Quinn, Newsweek, August 30, 2004.

The Hidden Costs of Annuities, by Tom Halsted, Investopedia, March 13, 2002.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

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June 1, 2010

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