CD vs Fixed Annuity

Both CDs and deferred fixed annuities are savings vehicles used to accumulate wealth.
To start off…

If you’re debating whether the best place for your money is a certificate of deposit (CD) or deferred fixed annuity, the answer depends upon your individual financial situation and investment objectives.

Both CDs and deferred fixed annuities are savings vehicles used to accumulate wealth. However, these two products are quite different; each has its own unique strengths and uses. For the sake of comparison, let’s look at two similar versions of these products — an individually owned, Non–Qualified bank CD and an individually owned, Non–Qualified single premium deferred fixed annuity earning an annually renewable fixed rate of return.

Review the list of objectives and identify those which are most important to you. This will help determine which of these two products is best suited for your needs at this time.

Safety of Principal

Both CDs and deferred fixed annuities are considered low–risk investments. CDs are generally issued by banks and, in most cases, are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor. Should the bank fail, the FDIC guarantees CDs up to this amount.

Deferred fixed annuities are issued by insurance companies and are not insured by the U.S. government. They are backed by the financial strength of the issuing insurance company, regardless of the amount. Therefore, before purchasing an annuity, you should make sure the issuing insurance company is financially sound. You can determine financial strength by requesting the findings of independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch. These companies evaluate the financial strength of insurance companies and publish ratings that give their assessments of each company.

Short-term Accumulation

When deciding between a CD and a deferred fixed annuity, your investment horizon should be a key factor. Your investment horizon is the amount of time you need to save for a specific goal. For short–term goals, such as a down payment on a home or a new car, a CD may prove to be a better choice. CD maturity periods can be as short as one month or as long as several years.

Long-term Accumulation

A deferred fixed annuity is generally the product of choice for the long haul. Deferred fixed annuities are designed to help accumulate money for retirement or to protect funds already saved once you’ve reached retirement. In later years, a deferred fixed annuity is usually more flexible for accessing your money. They can even be used to provide a legacy for your heirs.

Tax Savings

If taxes are a concern, a deferred fixed annuity may be a better option for several reasons.

Earnings on CDs are taxable in the year the interest is earned, even if you don’t take the money out. With deferred fixed annuities, earnings accumulate tax–deferred and are not treated as taxable income until they are withdrawn, which gives you a measure of control over when you pay taxes.

As you can see from the chart below, it makes good investment sense, when saving for the long term, to have the power of tax deferral on your side.

Deferred fixed annuities may also help reduce or eliminate the taxes on your Social Security benefits. By leaving your money in a deferred fixed annuity, you can reduce your taxable income, keeping it below the level where you would begin to owe taxes on your Social Security benefits. With CDs, your interest earnings count in the calculation of how your Social Security benefits will be taxed — even if you don’t withdraw the earnings. As much as 85% of your Social Security benefits could end up subject to taxation.

At death, the annuity’s account value will be paid directly to your named beneficiary(ies), avoiding the costs and delays associated with probate. This is not the case with a CD, which may be subject to probate. (Please note, however, that both fixed annuities and CDs are subject to estate tax, and the earnings inside a fixed annuity are subject to income tax when paid out. The earnings in a CD have already been taxed when earned.)

This is for informational purposes only and should not be construed as tax advice. Please consult with your tax advisor.


If you need access to the funds in a CD prior to the maturity date, you may pay an interest penalty ranging from 30 days’ to six months’ interest. Of course, you can limit your exposure to surrender penalties by investing in several CDs with staggered maturity dates.

A deferred fixed annuity also provides you with access to your money should the need arise. With a deferred fixed annuity, withdrawals during the first several years are generally subject to surrender charges. Most companies will give you the flexibility, however, to withdraw a portion of your deferred annuity’s account value, usually 10% each year, without a company–imposed surrender charge. Once the surrender charge period has expired, you can generally access your money at any time without surrender penalties. Withdrawals may be taxable and, if they are made prior to age 59½, may be subject to a 10% penalty tax.