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When Comparing a Farmers Annuity with a CD
Can you answer these important questions?
To better understand whether you're better off putting your money in a CD or a Farmers
Annuity, you need to ask a couple of questions. To answer these questions, it's helpful
to illustrate the accumulation and withdrawal features of each, as well as their tax
implications. Let's compare a $100,000 lump sum payment into a CD and a Farmers Annuity,
each earning a 6 percent interest. The client is in a 36 percent federal income tax bracket.
What happens to the interest accumulating in my account each year?
Interest earned in a CD is subject to federal income tax each year. Taxes on cash
accumulating in an Annuity are deferred until it's withdrawn.
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CD
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Annuity
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$6,000
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$6,000
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(Interest in first year)
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$106,000
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$106,000
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(Balance at end of first year)
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$2,160
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$0
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(Taxes collected on interest*)
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*While the account balances are equal, the CD client owes $2,160 in taxes on the
interest earned on the CD.
How about liquidity?
There is usually a stiff penalty for withdrawing funds from a CD prior to the CD
maturity date. However, subject to certain minimums and limitations, you may
withdraw up to 10 percent of your Farmers Annuity fund balance each year.
(Amounts over 10 percent are subject to Company surrender charges during
the first seven years. Federal tax penalties may apply to withdrawals prior
to age 59 and a half.)
How fast will my money grow?
Funds will actually accumulate at the same rate. However, interest earned on a CD
is taxed each year, while cash accumulating in an Annuity is not taxed until withdrawn.
As a result, your tax obligation will be higher with a CD while you're accumulating
funds. On the other hand, withdrawals from an Annuity are subject to Federal income
tax to the extent there is a gain (the fund balance minus total premium payments).
Most people don't withdraw Annuity funds until retirement when they may be in a
lower income tax bracket. Withdrawals from a CD are not currently taxed. For the
comparison below, 36 percent tax was deducted from the CD each year. At the end of
the 10th and 20th years, we assume the client elects to surrender the Annuity and 36
percent tax is deducted from the gain.
insert table here
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CD
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Annuity
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| $145,763 |
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$179,085 |
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Balance at the end of year 10 |
| $0 |
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-$28,471 |
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Taxes collected on gain |
| $145,763 |
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$150,614 |
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After tax balance |
| $212,468 |
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$320,714 |
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Balance at the end of year 20 |
| $0 |
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-$79,457 |
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Taxes collected on gain |
| $212,468 |
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$241,257 |
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After-tax balance |
On the Annuity, federal tax penalties may apply to withdrawals prior to age 59 and a half.
Surrender charges also apply during the first seven years.
In 20 years, which would you rather have when you retire?
The Annuity. Under our example, deferring taxes with an Annuity can net an additional $28,789.
One Final Question...
When does your next CD come due?
Several Factors to Consider...
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FNWL offers several plans, all with competitive interest rates
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Mortality studies show that people are living longer than ever before
and will need to increase savings to supplement Social Security
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Annuities offer the advantage of tax-deferral of interest earned until
distributed, when you may be in a lower tax bracket
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Interest on a CD is taxable every year interest is earned
| Single Premium Immediate Annuity | Single Premium Deferred Annuity |
| When Comparing A Farmers Annuity with a CD | A Tax-Sheltered Annuity | |
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