Fixed annuity vs. CD: what's the difference?

If you want steady growth without the ups and downs of the stock market, you may be weighing a fixed annuity vs. CD. Both are common choices for safer savings.

They can look alike at first. But they work in different ways, and those differences matter as you plan for retirement.

What each one is

A CD is a type of savings account offered by banks and credit unions. You generally agree to leave your money there for a set term in exchange for interest.

A fixed annuity is a contract you buy from an insurance company. During the growth years, the contract promises at least a minimum interest rate, and the insurer may credit more.

Some fixed annuities can also pay you a stream of income, even for life. That is something a CD does not offer.

Who stands behind your money

This is one of the biggest differences. Each product has a different kind of protection.

• CDs: Bank CDs are insured by the FDIC up to applicable limits. Credit union CDs have similar coverage through the NCUA.
• Fixed annuities: Annuities are not covered by the FDIC or any other federal agency. Their guarantees depend on the claims-paying ability of the insurance company that issues them.

States also have guaranty associations that offer some protection if an insurer fails. That protection has limits that vary by state, so it's worth checking the rules where you live.

How taxes work

CD interest is taxable. In general, it's taxed in the year it becomes available to you, even if you leave it in the CD.

Fixed annuity growth is tax-deferred. You generally don't pay tax on the earnings until you take money out.

When you do withdraw earnings, they are taxed as ordinary income. If you take money out before age 59½, you may also owe a 10% IRS penalty.

Tax deferral lets earnings keep growing without a yearly tax bill. Still, it isn't the right fit for everyone, so it's smart to talk with a tax professional.

Getting to your money

Both products expect you to leave your money alone for a while. Each has a cost if you pull out early.

• CDs charge a penalty fee if you withdraw before the term ends. The amount varies, so compare it when you shop.
• Fixed annuities usually have a surrender period that can last several years. Taking out more than the allowed amount during that time can lead to a surrender charge.

Many annuities let you take out a set amount each year without a surrender charge. We explain the details in how annuity surrender periods work.

Fixed annuity vs. CD: which might fit your goals

Here are a few questions that can help you think it through.

• Do you need this money soon? A shorter CD may be easier to work with.
• Are you saving for retirement and want growth to be tax-deferred? A fixed annuity may be worth a look.
• How important is FDIC insurance to you? Only the bank CD offers it.
• Would you like the option to turn savings into income later? Some annuities offer that, sometimes through an income rider.

Locking in a rate with either product means you could miss out if rates rise. Some people use both, for example keeping an emergency fund in CDs and longer-term savings in a fixed annuity.

You can learn more on our fixed annuity page.

Common questions

Is a fixed annuity safer than a CD?

They have different kinds of protection, so neither is simply safer. A bank CD is FDIC-insured up to limits, while a fixed annuity relies on the insurer's claims-paying ability.

Can you lose money in a fixed annuity?

The contract credits at least a minimum rate while you hold it. But surrender charges or a market value adjustment can lower what you receive if you withdraw early.

Bottom line

CDs and fixed annuities both aim to offer steady, predictable growth. The main differences come down to who backs the product, how it's taxed and how long your money is tied up.

There is no single right answer. Our team can help you compare the trade-offs and decide what fits your timeline and goals.

Have questions about your situation? Book a complimentary call with our team.

This article is for general education only and isn't financial, tax or legal advice. Product features vary by carrier and state. Talk with a licensed professional about your situation.