Annuities Vs CDs: Similarities And Differences

An annuity is when an insurance company makes regular payments to a person for a set period or for the rest of their life. A Certificate of Deposit (CD) is a deposit offered by banks and credit unions that offers an individual a fixed rate of interest higher than the rate on a savings account. 

Annuities vs CDs: Similarities and Differences

While an annuity can provide a guaranteed stream of income in retirement and may offer tax-deferred growth, a Certificate of Deposit (CD) can provide you the profits of high interest deposits. In a CD agreement, the individual deposits a specific amount of money for a fixed period of time, usually ranging from a few months to several years.

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CDs are typically considered to be low-risk investments because the principal is insured by the FDIC up to certain limits. However, they offer limited liquidity and penalties for early withdrawal may apply.

Comparison Of Annuities Vs. CDs

Both Annuities and CDs are investment options that will provide you an increase in profit. Annuities income is paid to an individual from an insurance company in set payments for an extended period of time. The income from CDs is generated by the interest payments paid to an account from a bank.

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What Is A Fixed Annuity?

A fixed annuity is an insurance contract that guarantees a fixed interest rate for a set period of time. When you purchase a fixed annuity, you pay a lump sum to an insurance company in exchange for a series of payments that start immediately or at a later date.

The payments may continue for a specific number of years or for the rest of your life.

What Is A CD?

A CD, or Certificate of Deposit, is a savings certificate that is issued by a bank or credit union. You deposit a fixed amount of money for a set period of time. The bank pays you a fixed interest rate on your deposit, and you receive your principal and interest when the CD matures.

The range of time when you may deposit your money can range from a few months to several years.

Similarities And Differences Between Annuities And CDs

Annuities and CDs are similar in that they both offer a fixed rate of return on the investment and can provide a reliable source of income. They are also considered relatively low-risk investment options. Their differences are in their flexibility, interest rates, penalties, and risk.

Type Of InvestmentInsurance-based investmentBank-based investment
Interest RateFixed or variableFixed
MaturityCan be lifetime or set periodSet period
WithdrawalsCan be structured as periodic payments or lump sumsPenalties for early withdrawals
LiquidityCan be limitedCan be limited with early withdrawal penalties
TaxationEarnings grow tax-deferred; taxes due upon withdrawalEarnings are subject to taxes each year
RiskInsurance company’s credit riskLow risk, insured by FDIC up to $250,000 per depositor per insured bank
Potential ReturnsHigher potential returnsLower potential returns
PurposeDesigned to provide income in retirementDesigned for short-term savings and to preserve principal
AccessibilityAccessible to anyoneRestricted to accredited investors or high net worth individuals

Annuities are typically sold by insurance companies and are designed to provide a guaranteed stream of income for a fixed period or for the rest of the individual’s life. CDs, on the other hand, are sold by banks and credit unions and provide a fixed rate of return for a fixed term.

Annuities may offer tax-deferred growth and are often used for retirement planning. CDs offer a higher interest rate than savings accounts but may have limited liquidity and penalties for early withdrawal. Annuities may have higher fees and expenses compared to CDs.

CDs Vs. Annuities

When it comes to choosing between CDs and annuities, it is important to understand the key differences between the two investment options. These differences lie in their levels of risk, flexibility, interest rates, tax implications, liquidity, penalties, and beneficiaries.

Asset Protection✔️✔️
Savings/Investment Opportunities✔️✔️
Retirement Income✔️
Estate Planning✔️
Inflation Protection✔️
Guaranteed Income✔️
Potential For Growth✔️✔️
Ability To Customize✔️
The Pros and Cons of Annuities Infographic (Tax-deferred growth, guaranteed income, diversification, fees, restrictions, inflation risk).


CDs are considered to be low-risk investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit.  Annuities, on the other hand, are not FDIC-insured and are subject to the financial strength of the issuing insurance company.

This means that annuities carry a higher level of risk than CDs.


CDs are relatively inflexible because the money is tied up for a fixed period of time, typically ranging from a few months to several years. Annuities, on the other hand, offer more flexibility in terms of payment options, and some annuities allow individuals to withdraw money without penalties.

With a CD, if an individual needs to withdraw the money before the CD matures, they may face penalties. 

Interest Rates

Both CDs and annuities offer fixed rates of interest, but the rates can vary. CDs typically offer a lower rate of interest than annuities because they are lower risk. Annuities can offer either a fixed or variable rate of interest depending on the type.

Fixed annuities have a set interest rate for the life of the annuity, while variable annuities are invested in sub-accounts that can fluctuate in value.

Tax Implications

CDs and annuities also have different tax implications. With CDs, interest earned is taxed as ordinary income in the year it is earned. With annuities, taxes are deferred until the money is withdrawn, and in some cases, withdrawals may be taxed at a lower rate.

Annuities may have fees and expenses that can reduce the overall returns.

Liquidity And Penalties

CDs typically have lower liquidity than annuities. With CDs, individuals cannot access their money without penalty until the CD matures.  Annuities can offer more flexibility and may allow individuals to withdraw money without penalty after a certain period of time. 

Annuities may also have surrender charges that apply if money is withdrawn before a certain date.


Both CDs and annuities allow individuals to name beneficiaries to receive the proceeds upon their death. However, annuities can offer more flexibility in how the death benefit is paid out.

Pros And Cons Of Annuities Vs. CDs

Here are some pros and cons of annuities:

Pros Of Annuities:

  1. Guaranteed Income: One of the biggest benefits of annuities is that they can provide a guaranteed stream of income for the rest of your life, regardless of how long you live.
  1. Tax Deferral: With annuities, you can defer taxes on your investment gains until you withdraw your money. This can help reduce your current tax bill and potentially lower your tax rate in retirement.
  1. Protection From Market Volatility: Fixed annuities offer protection from market volatility, which can be particularly attractive to retirees who don’t want to risk losing their principal investment.
  1. Death Benefit: Many annuities offer a death benefit, which means that if you die before receiving all of your payments, your beneficiaries will receive the remaining balance of the annuity.
  1. Customizable: There are many different types of annuities available, which means that you can choose an annuity that fits your specific financial goals and needs.

Cons Of Annuities:

  1. High Fees: Annuities can be expensive, with fees that are often higher than other types of investments. It’s important to understand the fees and charges associated with any annuity before making a purchase.
  1. Lack Of Liquidity: Annuities are designed to be long-term investments, which means that they are not always easy to access. If you need to withdraw your money before the end of the contract, you may face high penalties and fees.
  1. Complex: Annuities can be complex financial instruments, and it can be difficult to understand all of the terms and conditions associated with an annuity.
  1. Potential For Inflation Risk: Fixed annuities provide a fixed rate of return, which means that they may not keep pace with inflation. This can be a concern for investors who want to maintain their purchasing power over time.
  1. Risk Of Insolvency: While annuities are generally considered safe investments, there is always a risk that the insurance company that issued the annuity could become insolvent. In this case, your annuity payments may be at risk. It’s important to research the financial stability of any insurance company before purchasing an annuity.

Pros of CDs:

  1. Safety: CDs are generally considered a safe investment because they are insured by the FDIC for up to $250,000 per account.
  1. Predictable Returns: CDs offer predictable returns, as the interest rate is fixed for the term of the CD. This makes it easier to plan for future expenses or savings goals.
  1. No Fees: There are typically no fees associated with investing in CDs.
  1. Short-Term Or Long-Term Investment: CDs are available in different terms, ranging from a few months to several years, making them suitable for short-term or long-term investments.

Cons Of CDs:

  1. Low Returns: The returns on CDs are generally lower than other investment options such as stocks, mutual funds or real estate.
  1. Illiquidity: CDs are not very liquid, meaning that your money is tied up for the duration of the CD term. Withdrawing your money early may result in penalties or forfeiting some of the interest earned.
  1. Limited Flexibility: CDs do not offer the same flexibility as some other investments. Once you have invested your money, you cannot add or withdraw funds until the CD matures.
  1. Inflation Risk: Inflation can erode the value of the returns on a CD over time, especially if the interest rate on the CD is not keeping pace with inflation.

Are CDs And Annuities Safe?

CDs and annuities are both considered relatively safe investment options, but they do have different levels of risk and safety features to consider.

Safety Features Of Both Annuities And CDs

Certificates Of Deposit (CDs)

CDs are considered one of the safest investment options available because they are backed by the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000 per depositor. This means that even if the bank where you have a CD fails, you will still receive your deposit, up to the insured limit.


Annuities are considered relatively safe investments because they are issued by insurance companies that are regulated by state insurance departments. 

Insurance companies must maintain reserves and meet certain financial standards to ensure that they are able to pay out future claims to their policyholders. However, unlike CDs, annuities are not insured by the FDIC, so there is no guarantee of principal protection.

Level Of Risk In Annuities And CDs

Certificates Of Deposit (CDs)

CDs are a low-risk investment option, with little risk of loss of principal. The interest rates on CDs are generally lower than other types of investments, but they are a predictable and safe investment. 

I interest rates rise during the term of a CD, the rate you are earning may be less attractive compared to other investment options.


Annuities carry more risk than CDs, but they also offer the potential for higher returns. The level of risk in an annuity depends on the type of annuity you choose. 

Fixed annuities offer a fixed interest rate, which makes them a low-risk investment option, while variable annuities are tied to the performance of underlying investments and can carry more risk. 

Indexed annuities offer a return based on the performance of an underlying index and offer some upside potential, but also carry some risk. Annuities may also have surrender charges if you withdraw money before the end of the surrender period.

Early Withdrawal Penalties

Both annuities and CDs have early withdrawal penalties that investors should be aware of before investing. Early withdrawal penalties are fees charged by financial institutions to investors who withdraw funds from their annuity or CD before the maturity date.

Penalty AmountTypically ranges from 7% to 10% of the withdrawal amount in the first few years of the contract, decreasing over timeTypically ranges from 1% to 5% of the withdrawal amount, depending on the institution and terms of the account
Withdrawal PeriodVaries depending on the annuity contract, but typically ranges from five to ten yearsVaries depending on the CD term, but typically ranges from 30 days to several years
ExceptionsSome annuities may offer exceptions for certain circumstances, such as death, disability, or hardshipSome institutions may offer exceptions for certain circumstances, such as death, disability, or hardship
Tax ImplicationsWithdrawals from annuities before age 59 ½ may also incur an additional 10% early withdrawal penalty tax in addition to regular income taxWithdrawals from retirement CDs before age 59 ½ may also incur an additional 10% early withdrawal penalty tax in addition to regular income tax

Note: The table provides general information about early withdrawal penalties for annuities and CDs, but specific details can vary depending on the institution and the terms of the account or contract. It is important to carefully review the terms and conditions of any investment before making an early withdrawal to understand the potential penalties and any exceptions that may apply.

For annuities, early withdrawal penalties can be significant, often costing several percent of the value of the annuity. This is because annuities are designed to be long-term investments, and withdrawing funds early can negatively impact the insurer’s ability to provide the guaranteed income stream promised to the investor. Early withdrawal penalties for annuities typically decrease over time, with many contracts allowing for a certain percentage of the account value to be withdrawn penalty-free each year.

For CDs, early withdrawal penalties can vary depending on the institution and the length of the CD term.The longer the term of the CD, the higher the penalty for early withdrawal. 

CD early withdrawal penalties can range from a few days’ worth of interest to several months’ worth of interest. It’s important for investors to understand the penalties for early withdrawal before investing in a CD, as unexpected needs for cash could result in significant fees.

It’s also worth noting that some annuities and CDs may offer features such as a waiver of early withdrawal penalties in certain circumstances, such as death, disability, or hospitalization. However, these features may come at an additional cost or reduce the overall return of the investment.

Factors To Consider When Choosing An Annuity Or A CD

When choosing between an annuity and a CD, there are several factors to consider to determine which investment is the right choice for your individual needs and financial goals. Here are some key factors to consider:

  1. Investment Goals: The first factor to consider is your investment goals. Are you investing for the short-term or the long-term? Are you seeking income or growth? Understanding your investment goals can help you determine which investment vehicle is best suited for you.
  1. Risk Tolerance: Annuities and CDs have different levels of risk. Annuities carry more risk due to their potential for higher returns, while CDs are a lower-risk investment. Consider your risk tolerance and comfort level with different levels of risk when choosing between the two options.
  1. Time Horizon: The length of time you plan to hold your investment can also be a factor to consider. Annuities are generally long-term investments, while CDs have specific terms that can range from a few months to several years. Consider how long you want to commit your funds to an investment before making a decision.
  1. Liquidity: Annuities can be less liquid than CDs, meaning that it may be more difficult to access your funds in the event of an emergency. CDs typically have a set term and can have penalties for early withdrawal, but they can still offer more liquidity than annuities. Consider your need for liquidity when choosing between the two.
  1. Tax Implications: Annuities and CDs have different tax implications. Annuities offer tax-deferred growth, meaning that taxes on earnings are not due until withdrawals are made, while CDs are taxed annually on interest earned. Consider the tax implications of each option and how they fit with your overall tax strategy.
  1. Fees And Expenses: Both annuities and CDs can have fees and expenses associated with them. Annuities can have higher fees and expenses than CDs, which can impact your overall returns. Consider the fees and expenses associated with each investment before making a decision.

Is An Annuity Better Than A CD?

Whether an annuity is better than a CD depends on individual financial goals and circumstances. Annuities offer several benefits over CDs, such as tax-deferred growth, potential for higher returns, and the ability to provide lifetime income. 

Annuities also have higher fees and expenses, and may have surrender charges if money is withdrawn before a certain date. On the other hand, CDs offer safety of principal, low risk, and are FDIC-insured. CDs can be a good choice for those seeking a conservative investment with predictable returns.

Ultimately, the decision between an annuity and a CD depends on the individual’s financial goals, risk tolerance, and investment timeline. 

Annuities may be a good choice for individuals looking for a long-term investment that can provide guaranteed income, while CDs may be more appropriate for those seeking low-risk investments with a shorter time horizon. It is important to carefully evaluate each option and consult with a financial professional before making any investment decisions.

Fixed Annuity Vs. CD – Which Is Right For You?

A fixed annuity and a CD are both investment options that can provide a steady stream of income. However, they differ in terms of features, benefits, and drawbacks. Here is an overview of the key features of fixed annuities and CDs.

  • Tax Deferral: Both fixed annuities and CDs offer tax-deferred growth, meaning you won’t pay taxes on the interest until you withdraw the funds. However, fixed annuities offer more flexibility when it comes to taxes, as you can choose when to start taking distributions and pay taxes on the income.
  • Rate Of Return: The interest rates on fixed annuities and CDs can vary depending on the issuer and the length of the term. Generally, fixed annuities offer higher interest rates than CDs, but the rates may be subject to change over time.
  • Principal Protection: Both fixed annuities and CDs are considered safe investments because they offer FDIC or SIPC insurance, which means that your principal is protected up to certain limits.
  • Liquidity: CDs typically have a penalty for early withdrawal, which can range from a few months’ interest to the loss of all accrued interest. Fixed annuities also have surrender charges if you withdraw your funds before the end of the contract term. However, some fixed annuities offer partial or full liquidity after a certain period.
  • Market Exposure: CDs are not directly exposed to market fluctuations, and the interest rate is fixed for the entire term. Fixed annuities may offer a higher rate of return than CDs, but they are subject to market risk.

Recap: A fixed annuity may be a better option if you are looking for guaranteed income, tax-deferred growth, and protection from market fluctuations. A CD may be a good choice if you need a safe place to park your money for a short period and want a guaranteed rate of return.


When deciding between an annuity and a CD, there are a variety of factors to consider. An annuity may be a good choice for someone who is looking for a steady stream of income in retirement, is willing to take on some risk, and wants tax-deferred growth. 

On the other hand, a CD may be a good choice for someone who wants a low-risk investment, is looking for a specific amount of guaranteed return, and has a short-term investment horizon.

It’s important to carefully evaluate your financial goals, risk tolerance, and other individual circumstances to determine which option is best for you. Working with a financial advisor can also help you make an informed decision that aligns with your unique needs and goals. 

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