Annuity vs CD.?

Question

My mom has quite a sizeable annuity (drawing 3% annually) upon which I'll have to pay taxes when she dies. She's been wondering if she should withdraw the money and put it in a CD, drawing about 2.5% annual interest. She doesn't get enough retirement money to pay taxes and doubts if she'll have to pay taxes on the money she withdraws from the annuity. Would this be a wise move?

Answer 1

I can't decide which is WORSE.  I can tell you these are the two worst options that exist.  A SAVINGS account is as good an option as either.  A money market mutual fund is a nearly risk free option with as good or better return and better access than a CD.  A stock mutual fund is even better for long term investing.

Answer 2

Withdraw it but dont put it in a CD. the cd rate doesnt beat inflation so your money doesnt have the same purchasing power by the time you need it. invest in mutual funds in an ira account. depending on your needs they can be good for the long run or short term. it sounds like you need help for short term and some funds do pay a monthly dividend or quarterly.  also dont invest in riskier stocks but invest in medium bonds. money markets cant beat inflation either so stay away from those. If your worried about taxes the govt will get you almost in anything u invest.

Answer 3

Are you sure about the paying taxes on the annuity when she dies?  Annuities are insurance products.  If it's tied into some sort of death benefit payout, that should be tax free.

Generally, if she's got an annuity already, it's usually just better to leave it alone.  Often they have all kinds of crazy surrender charges if you get out early.

Answer 4

You did not say if your mom was drawing the interest or not.  If she is drawing the interest and her income is still not enough to have to pay taxes then there is no problem.  As the beneficiary, you would only have to pay taxes on all of the accumulated interest that she did not withdraw.  Any money she withdraws is considered interest first.  An annuity passes to the beneficiary without going through probate.  Inheritance taxes would likely be due on the CD so there would be money to pay either way.  Another point to consider is whether or not there would be a penalty to close the annuity.