Annuity vs CD: How Do They Compare and Which is Best?

Clifford PendellWritten by Clifford Pendell
Louis LopesReviewed by Louis Lopes, CLU ChFC

With current interest rates at their highest since 2008, more people are considering investing.

But when it comes to earning a return on your investment, which is the better option: an Annuity or a CD? And which type of annuity is best suits my needs?

While both products are considered safe, purchasing a fixed deferred annuity offers several advantages, especially if you’re seeking long-term growth to subsidize your retirement.

In this article, we’ve compared the advantages and disadvantages of purchasing an annuity instead of a CD. We’ve also explained the most common types of annuities available help you make an informed decision.

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What Are the Different Types of Annuities

There are two primary forms of annuities: fixed and variable. A fixed annuity is the safest option because it offers a guaranteed interest rate, ensuring your money will grow regardless of market conditions. On the other hand, a variable annuity’s performance is tied to the market, meaning that if your investments underperform, you could incur losses.

While variable annuitiues carry increased risk, they also have the potential to yield higher returns. This makes them more suitable for younger, long-term investors who are willing to tolerate greater risk for the possibility of larger rewards. This article primarily focuses on fixed annuities because they offer guarantees similar to a CD.

An annuity can also be deferred or immediate. Immediate annuities start making payments within a month of funding, whereas defered annuities can extend up to 45 years before payments begin. During this deferral period, your investment can grow untaxed, allowing you to maximize your investment’s potential.

What’s the Difference Between a CD and an Annuity?

Certificates of deposit (CDs) and annuities are both reliable ways to grow your money over time. Each option is considered extremely secure and comes with guarantees from the insurer or the FDIC (for deposits up to $250,000). The main difference between the two strategies is the investment period.

Some CDs may take as long as 10 years to mature, but the most competitive interest rates are often reserved for terms of 2 years or less. This makes annuities a preferable choice for individuals seeking to invest their funds for longer-term investments, particularly those aiming to bolster their retirement savings.

Additionally, while annuities typically require a longer commitment than CDs, they also offer extended guarantees. If you're unsure of which option is right for you, consider your investment timeline. If you will need access to your money in less in the next two years, a CD is likely your best option.

If you’re comfortable setting your money aside for at least 2-10 years, a deferred annuity will probably be your best option. With this strategy, you can lock in today’s interest rates and allow your money to grow, tax-free, for up to 20 years.

We've provided a comprehensive comparison of the advantages and disadvantages of CDs and annuities in the following section to help you make an informed decision about which option best aligns with your financial goals.

What Are the Advantages to an Annuity?

Interest rates are the highest they’ve been in nearly two decades, and purchasing a fixed annuity will allow you to lock today’s rates for up to 20 years. Unlike CDs, annuities also provide tax-free growth, maximizing your earnings potential until your annuity matures.

While some CDs offer terms of 10 years or more, the most competitive interest rates are usually offered for terms of 6 months to 2 years. Annuity providers, on the other hand, tend to offer the most competitive rates across the board, but especially for annuities extending past 10 years.

This makes annuities ideal for individuals seeking a guaranteed return on their investment for the foreseeable future. However, this advantage can also be perceived as a downside to purchasing an annuity because accessing your money early may result in withdrawal fees that can erode your savings.

Fortunately, many annuities will allow you to withdrawal up to 10% of your balance, but this is not standard with every provider, so it’s important to review the terms and conditions before proceeding.

Another advantage of annuities is the option to annuitize your investment to guarantee lifetime income. Moreover, most annuities offer the option for joint lifetime income, providing additional security to the account holder’s beneficiary. This feature provides peace of mind to individuals with dependents who rely on them for financial support, ensuring that loved ones are taken care of in the event of the account holder’s passing.

The combination of the guaranteed returns and the life insurance benefit makes annuities a more compelling option for those seeking both financial stability and protection for their loved ones. However, despite their advantages, there are downsides to purchasing an annuity, which we will explore in the following section.

What Are the Downsides to an Annuity?

The primary disadavantage of an annuity is the commitment period. Fixed annuities offer differed growth for 10 to 20 years, during which your investment is guaranteed to grow. However, if you experience financial hardship, and need to access your money early, you may face penalties. While some annuities allow early withdrawals without penalty, they are usually limited to 10% of your balance. 

CDs also impose fees or penalties if you access your money before the CD matures. Additionally, you will not be penalized by the IRS for using your savings before the age of 59 ½. However, CDs restrict the investment period to the term, potentially exposing investments to market fluctuations if interest rates decline.

The same risk applies to annuities, but an annuity will allow you to lock in a higher rate for longer. In theory, this could serve as an advantage if interest rates continue to rise, enabling you to reinvest your savings at a higher rate. However, most financial analysts and the Federal Reserve anticipate interest rates decreasing by the end of this year.

A variable annuity aligns your investment with the stock market, offering potential growth opportunities, but also exposing it to market downturns, thereby eroding the security provided by a fixed annuity. For this reason, many financial advisors recommend avoiding the risk.

CD vs Annuity Benefits Comparison Chart

The following table compares the benefits and features of a CD and an annuity.


Certificate of DepositFixed Deferred Annuity
Investment Timeline6 Months to 45 Years5 Years to 45 Years
Interest RateGuaranteedGuaranteed
Tax TreatmentTaxed As IncomeTax-Differed
SecurityInsured by FDIC (Up to 250k)Guaranteed by Insurer
Insurance ComponentNoneLifetime Income Option

Real Life Example of A CD vs Annuity

The table displayed below compares the investment potential of an annuity to a CD, showcasing the benefits of tax-deferred growth. Both accounts start with an initial deposit of $100,000 held for 25 years. At the end of the term, the annuity is significantly outperforming the CD by more than 43%.

CD Account

Annuity

Year

BOY Saving

Interest earned

Tax

EOY Saving

Year

BOY Saving

Interest earned

Tax

EOY Saving

1

$100,000

$5,000

$1,500

$103,500

1

$100,000

$5,000

$0

$105,000

2

$103,500

$5,175

$1,553

$107,123

2

$105,000

$5,250

$0

$110,250

3

$107,123

$5,356

$1,607

$110,872

3

$110,250

$5,513

$0

$115,763

4

$110,872

$5,544

$1,663

$114,752

4

$115,763

$5,788

$0

$121,551

5

$114,752

$5,738

$1,721

$118,769

5

$121,551

$6,078

$0

$127,628

6

$118,769

$5,938

$1,782

$122,926

6

$127,628

$6,381

$0

$134,010

7

$122,926

$6,146

$1,844

$127,228

7

$134,010

$6,700

$0

$140,710

8

$127,228

$6,361

$1,908

$131,681

8

$140,710

$7,036

$0

$147,746

9

$131,681

$6,584

$1,975

$136,290

9

$147,746

$7,387

$0

$155,133

10

$136,290

$6,814

$2,044

$141,060

10

$155,133

$7,757

$0

$162,889

11

$141,060

$7,053

$2,116

$145,997

11

$162,889

$8,144

$0

$171,034

12

$145,997

$7,300

$2,190

$151,107

12

$171,034

$8,552

$0

$179,586

13

$151,107

$7,555

$2,267

$156,396

13

$179,586

$8,979

$0

$188,565

14

$156,396

$7,820

$2,346

$161,869

14

$188,565

$9,428

$0

$197,993

15

$161,869

$8,093

$2,428

$167,535

15

$197,993

$9,900

$0

$207,893

16

$167,535

$8,377

$2,513

$173,399

16

$207,893

$10,395

$0

$218,287

17

$173,399

$8,670

$2,601

$179,468

17

$218,287

$10,914

$0

$229,202

18

$179,468

$8,973

$2,692

$185,749

18

$229,202

$11,460

$0

$240,662

19

$185,749

$9,287

$2,786

$192,250

19

$240,662

$12,033

$0

$252,695

20

$192,250

$9,613

$2,884

$198,979

20

$252,695

$12,635

$0

$265,330

21

$198,979

$9,949

$2,985

$205,943

21

$265,330

$13,266

$0

$278,596

22

$205,943

$10,297

$3,089

$213,151

22

$278,596

$13,930

$0

$292,526

23

$213,151

$10,658

$3,197

$220,611

23

$292,526

$14,626

$0

$307,152

24

$220,611

$11,031

$3,309

$228,333

24

$307,152

$15,358

$0

$322,510

25

$228,333

$11,417

$3,425

$236,324

25

$322,510

$16,125

$0

$338,635

In year 25, the annuity provides an annual income of $16,931 compared to $11,816 for the CD. Additionally, the annuity’s value at this time is much higher value than the CD’s; standing at $338,635 versus $236,234 respectively – a notable difference of more than $100,000.

Frequently Asked Questions

Which is better, a CD or an Annuity?

CDs and annuities both offer secure investment options. The main difference between the two products is their investment timeline. While most CDs mature within 2 years, annuities can extend for 20 years or more. This makes annuities a preferable choice for individuals aiming to invest long-term.

Why do annuities grow larger than CDs?

Annuities often outgrow CDs due to their tax-deferred growth feature, allowing which allows investors to delay tax payments until they access their money. Furthermore, annuities offer longer investment periods, allowing more time for your money to grow. Additionally, annuities often pay slightly higher interest rates.

Which is safer, a CD or an Annuity?

Both CDs and fixed annuities provide guarantees from the FDIC or the provider, making them extremely safe investment strategies. In contrast, variable annuities subject investors to market fluctuations, increasing their risk compared to CDs.

How We Can Help

If you’re still unsure whether to go with a CD or an annuity, we’ve got you covered. Our licensed agents have over a decade of financial planning experience and have helped thousands of families and businesses with their insurance and financial needs. Most importantly, our advice is completely free.

Let us help you make the right choice and contact us today toll-free at 855-247-9555. If you’re not ready to talk to someone now, you can also send us a message using the form below, and one of our agents will follow up with you within 24 to 48 hours.

Written by:

Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

Expert reviewed by:

Louis Lopes

Louis Lopes, CLU ChFC

Chartered Life Underwriter, Licensed Life and Health Agent

Louis has been in the insurance business for over 30 years. He specializes in “high risk” cases as well as more complex coverages for long term care, disability, and estate planning.

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