A Fixed Annuity Versus A CD (Certificate Of Deposit) – 6 Experts Weigh In

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A fixed annuity is a tax-deferred contract with an insurance company. A Certificate of Deposit (CD) is issued by a bank and is insured by the Federal Deposit Insurance Company (FDIC). They are similar and both savings vehicles have advantages and drawbacks. In this article, 6 experts weigh in on a fixed annuity versus a CD (certificate of deposit).

A Fixed Annuity Has Multiple Advantages That A CD Does Not Offer

“Fixed annuities have multiple advantages that CDs do not offer with few disadvantages.

One advantage of fixed annuities is that they offer tax deferral on the interest generated while the annuity is deferred. Unlike capital gains or dividends, interest does not get preferential tax treatment.

For investors seeking higher yields, annuities offer a greater return compared to CDs since you can delay taxation on your interest until you remove money from the annuity. That allows a more substantial amount of money to compound, unlike CD interest that is taxed annually. Additionally, insurance companies typically offer higher annuity rates with longer durations than bank CDs.

Annuities do have some disadvantages, though. For one, they are not FDIC insured. However, insurance companies usually have a lower risk profile than banks due to their strict investment regulations.

Also, annuities are a long-term investment and not as liquid for younger investors. If you remove money from an annuity before age 59 and a half, you need to pay an additional ten percent in taxes as a penalty.

CDs do not have this restriction. This early withdrawal penalty makes CDs better for younger investors who need the money earlier in life.”

Joseph Cirillo, Digital Life Insurance Agent and Co-Founder, Good Life Protection Insurance

Be Aware Of Their Similarities And Differences When Evaluating The Alternatives

“There is not a clear-cut preference between certificates of deposit (CDs) and annuities. Savers need to be aware of their similarities and differences when evaluating the alternatives.

Fixed annuities and CDs are similar in that they offer a fixed rate of interest on your savings for a predetermined amount of time. CDs are available for short periods while both CDs and annuities are an option for savers comfortable with a multiple-year commitment.

The primary difference between a CD and a fixed annuity is the issuer and the level of protection provided.

CDs are offered by banks and are insured by the FDIC (Federal Deposit Insurance Corporation). FDIC insurance protects the saver in the event of a bank failure prior to maturity of the CD. FDIC insurance limits vary by account type, starting at $250,000 per depositor, per bank. Credit unions can also offer CDs with insurance coverage provided by the National Credit Union Administration.

Fixed annuities are offered by insurance companies. Annuity contracts are not FDIC insured but rather backed by the claims-paying ability of the insurer.

CDs and fixed annuities have specific restrictions for early withdrawal. These restrictions vary depending upon the issuer and the offering. Savers should be familiar with any penalties associated with withdrawing funds prior to maturity.

CDs and fixed annuities also differ in how the interest is taxed. Interest earned on CDs is taxable in the year the interest is earned. Interest earned on fixed annuities is tax-deferred. Tax on the interest accumulated within a fixed annuity is not owed until it is withdrawn.”

Brendan Willmann, Certified Financial Planner, Granada Wealth Management 

The Difference Between Fixed Deferred Annuities And CDs

“Fixed deferred annuities are provided through insurance companies. If you're looking for long-term accumulation, you should invest in a fixed deferred annuity. They're typically used to save money for retirement. Taxes may also play a role in your decision as fixed deferred annuities are not taxed until it's withdrawn as opposed to CDs where earnings are taxable before it's withdrawn.

If you're looking for short-term accumulation, you should put it into a certificate of deposit (CDs). Maturity periods are shorter than fixed deferred annuities it can range from one month or a couple of years. Earnings are taxable as interest is earned before the withdrawal.”

Nathan Wade, Managing Editor, WealthFit Money

They Are Similar In That They Both Are Low-Risk Investments

 “Firstly these two are similar in that they both are low-risk investments. This is the main similarity. People who opt to invest in either of these are usually not open to risk. It is, therefore, a good thing to understand that compared to CDs, fixed annuities have almost the same level of risk.

Comparing the two in terms of investment time frame, CDs are better suited for short-term investment. This is because CDs allow you to make withdrawals as soon a month after setting the account up. Fixed annuities are however long-term and you're better suited using this tool as a retirement option. Other than just serving as a retirement tool, this can also be used as a means for passing wealth to future generations.

When it comes to matters taxation, you're better off having a deferred fixed annuities account rather than a CD account. This is because CDs earnings from a CD account are taxed in that same year. For the fixed annuities, however, this is deferred and thus you can better protect your savings. Fixed annuities guarantee you the peace of mind that your savings or investments are not subjected to rapidly changing tax regimes.

Fixed annuities and CD's offer the same kind of security when it comes to your investment. However, looking at the technical aspects of both, you're rather safe investing in fixed annuities when compared to CDs.”

Edith Muthoni, Chief Editor, Learnbonds.com

Completely Dependent Upon Which One Best Suits The Investor

“Whether fixed deferred annuities or CDs are a better savings vehicle is completely dependent upon which one best suits the investor as there are significant differences in each especially in income taxation and ability to withdraw the interest payments.

Fixed deferred are typically very long-term at set interest rates with income held until a much later date to collect. Therefore, the investor just lets them earn interest without actually collecting it and all the while letting the principal build up as interest is accrued meaning that interest is assessed on both the principal and interest earned. Then, when they start collecting the annuity payouts from the built-up principal at a later date. This can have serious tax consequences. CDs, on the other hand, can be varying time terms usually from three months to ten years with taxes assessed annually as its earned.

The interest rates paid for these investments also vary significantly but are basically very close for the longer terms. Interest paid for CDs is more money market/prime interest rate-driven and determined based on the term of the CD which significantly affects the interest rate, especially for the short-term ones. Fixed deferred annuities, on the other hand, are not as much dependent and do not have wide swings in interest rates making them the more conservative alternative.”

Chane Steiner, CEO, Crediful 

CDs Should Be Considered For Short-Term Money, A Fixed Annuity Should Be Considered For Long-Term Money

“CD’s should be considered for short-term money looking to capture a slightly higher return with no risk. Do keep in mind the return is taxable. If someone is in the highest tax bracket, 40% of the return can be lost to taxation. That would hold true for a lower return on your money market and savings account as well.

A deferred annuity should be considered if you are dealing with long-term money (10 years or longer) and would like to eventually create and annual income you can never outlive. Your own personal pension. The annuity may offer higher returns than the CD and all of the growth would be sheltered from taxation. However, you have to pay income taxes and possibly penalty taxes and surrender charges to the annuity company depending on when and how you remove the funds.

These two can be great tools to have in your financial toolbox but you have to know what they are built to do and how to use them. The simple mistake people make when looking for risk-free higher yields on their cash is to just focus on what interest rate a certain tool will pay. The interest rate is only part of the story. You must first define your goals, purpose of the funds you are dealing with, the timeframe of use of those funds and then decide which tool makes the most sense to utilize. If you do not put in the time upfront to define your goals and plan, you may come to realize later on due to taxation, penalties and/or unexpected charges, it would have been more efficient to have used a different tool.

Always keep in mind, you can bang in a nail with a pair of pliers but it would be much more efficient if you used a hammer.”

Lou Cannataro, ChFC®, REBC®, AEP®, CASL®, CLU®, Partner Cannataro Park Ave Financial

There are pros and cons to any investment. Although similar, fixed annuities and CDs are different savings vehicles depending on the goals of an investor. If you are interested in either, always remember to do your due diligence and consult a financial professional before investing your money.

Sarah Bauder
Sarah Bauder

Sarah Bauder has a decade of experience at numerous publications, writing about finance, politics, economy and more.

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