
Subject: Re: Some yield de juour Date: 11/11/2005 11:55 AM
Recommendations: 8
I just checked the fixed interest annuities on Fidelity. The highest they're offering in NY state is 4.55% guaranteed for 10 years, surrender at 7 years--pretty close to the 10 year Treasury at 4.53%.

So would the 10 year Treasury be better due to the tax ramifications? I believe all the annuity income would be subject to state & local taxes, but the treasury income wouldn't--is my assumption correct?

Points to ponder:

- Treasury bonds are federally taxable in the year the interest is paid, but not state taxable.
- You can only take the coupon payments from a treasury; the rate you'd get if you re-invest them is not known
- 10-year CDs are advertised at 5.1% APY, minimum deposit $2500. They are federal and state taxable.
- CD interest is taxable in the year the interest is accrued, even if you don't withdraw it
- 10-year fixed annuities are available at 4.70% APY from an A-rated insurance company
- Annuities are tax-deferred; you pay taxes on withdrawal. But, you are not allowed to withdraw until you reach retirement age (59.5) or you pay heavy penalties. You pay federal tax on the gains. Depending on your state you may or may not pay state tax (a lot of states have a "pension income exclusion" if you're over a certain age).

CD vs. Treasury:
- Treasury might have a teensy bit more security in the event of massive bank failures
- Even if you live in a high tax state, the 5.1% CD wins (but not by much)
- With the CD you can let the interest compound inside the CD, if you have a cashflow available to pay the other taxes; with the treasury you get whatever the going rate is. If you'd started out with the interest compounding inside the CD, some CDs allow you to withdraw the interest without a penalty.
- With the treasury you may have a capital gain or loss if you sell early. With the CD you will pay an interest penalty (1 year?) if you cash it in early.

CD vs. annuity
- You have to guesstimate what your fed & state tax rates will be each year down the line, and what the effective tax rate will be when you withdraw, to really compare these
- But the CD has a huge advantage in the interest rate
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