CD-Type Annuities - Interest Can Reinvested

Virtually all CD-type annuities allow investors to reinvest their accrued interest. As with all types of annuities, your interest accrues with tax advantages. You owe no income tax on your interest until you actually take it out of the annuity. This ability to defer taxes indefinitely allows investors to control and often eliminate their income taxes.

Reinvested Interest is Compounded
When you reinvest your interest in a CD-type annuity, it is compounded. (You earn interest on your interest.) Since various CD-type annuities have different compounding periods (some compound monthly, some quarterly, etc.) many investors use a number called the annualized return to make an “apples-to-apples” rate comparison between the annuities.

The annualized return indicates the amount of interest that will accrue from the beginning of the year until the end. For example, a $100,000 account that is reinvesting will be worth $105,000 at the end of the first year on a CD-type annuity that has a 5% annualized return. At the end of the next year, the account would be worth $110,250 ($105,000 + 5%). And so on.