Annuity vs CD: Which Provides Better Returns?

Annuities and CDs both help grow savings but differ in structure, risk, flexibility, and returns. CDs offer FDIC-backed, lower-risk, fixed returns, while annuities provide more flexibility, higher potential returns, but with more complexity and risk. Choosing the right one depends on your goals, investment horizon, and risk tolerance.

• Issuer: Annuities are offered by insurance companies; CDs by banks/credit unions.
• Returns: CDs provide fixed, safer returns; annuities offer potentially higher, variable returns.
• Flexibility: Annuities allow lifetime or long-term payouts; CDs have shorter fixed terms.
• Risk & Protection: CDs are FDIC/NCUA-insured; annuities depend on insurer solvency.
• Taxes: CD interest is taxed yearly; annuity earnings are tax-deferred.
• Complexity: CDs are simpler; annuities involve fees and more setup considerations.
• Best Use Cases: CDs suit short-term goals; annuities better fit long-term retirement strategies.

There is no single right way to set aside savings for your retirement or another specific financial planning goal. From Roth IRAs and 401(k) plans to annuities, certificates of deposit (CDs), and other financial instruments, all have their value.

Today, we will specifically conduct an annuity vs CD comparison. In addition to explaining the mechanics of each account, we’ll address factors such as interest rates, payment distributions, short- and long-term return potential, and more.

What is the Difference Between an Annuity and a CD?

The first notable difference between annuities and CDs is in the issuing institution. Insurance companies offer annuities, while banks and credit unions provide CD accounts.

With both assets, you set aside money up front with the intent of earning it back in the future. CDs start with a lump-sum deposit and come back as that sum plus accrued interest. Annuities can begin as a lump sum (or with a series of premium payments) and then issue periodic returns.

But with an annuity, you have the option to begin seeing returns almost instantly (if you specifically choose a non-deferred income annuity). CDs always require you to wait a certain length of time before you can withdraw your funds and interest, anywhere from a few months to a few years.

In fact, if you take any funds from your CD account before the agreed-upon term ends, you often receive an early withdrawal penalty. (Tax penalties apply to early withdrawals from deferred annuities, which are meant to provide returns after a certain period.)

The other most important annuity vs CD difference lies in the level of protection each account affords.

The insurer providing your annuity will back your investment, but in a worst-case scenario where the carrier goes out of business, there is no 100% guarantee of recovering the money you invested (let alone the interest you’ve earned). CDs, meanwhile, bear the protection of either the FDIC (if bank-issued) or the National Credit Union Administration. Up to $250,000 of your CD funds are insured no matter what.

Annuity vs CD: Pros and Cons

The conventional wisdom about annuities vs CDs is that the former is best for retirement planning, while the latter functions most effectively as a vehicle for shorter-term savings. However, neither of these would-be truisms is 100% accurate.

To help you better determine which of these financial instruments is right for you, we will look at their advantages and disadvantages within specific categories.

Annuity vs CD: Rates

The interest rate attached to any investment account is perhaps the biggest determinant of its ultimate value. Both annuities and CDs offer better interest rates than most standard savings accounts, with the former often having the highest rates.

With that said, sheer percentage isn’t the only factor to consider when comparing an annuity and a CD by interest rate.

• CDs almost always have fixed interest rates, while annuity interest can be fixed, indexed, or variable.
• As such, if examining the interest for a fixed annuity vs CD interest, the annuity likely offers better returns with similar predictability. (The CD’s one advantage in this case comes from its FDIC/NCUA protection, which the annuity lacks.)
• Indexed and variable annuities are more high-risk/high-reward options.
  • There’s a temporary guaranteed rate of return on indexed annuities (usually several years), after which returns rise and fall (up to a certain cap and floor) based on market indices like the S&P 500.
  • Variable annuity rates change frequently based on the performance of investments funded by your initial premium payment. If the investments suffer, so do your returns.
• CDs are not immune from market forces, as factors like inflation and the Federal Reserve’s benchmark interest rate adjustments can change their value. But that still impacts your ultimate earnings less than potential stock market volatility.

Account Term Lengths

CDs offer limited term flexibility. You can deposit funds and leave them untouched for just a few months or several years – but most banks and credit unions draw the limit at five years. (Some, however, have 10-year CD options.) When the term ends, you aren’t obligated to withdraw immediately, but interest stops accumulating.

Annuities have far more versatility in term length. Some issue returns based on your contributions plus interest over several years – anywhere from 3-20, depending on the insurer. Others provide a steady stream of payments for the rest of your life. Either way, you have a great deal of flexibility, though lifetime-payout annuities offer smaller returns per payment.

Tax Concerns

Both annuity and CD returns are considered taxable income, but the payment requirements differ.

For CDs, you pay taxes on the interest earned for each year of the term (or the year you had the account, for CDs with terms under 12 months). Annuity income is tax-deferred, so you aren’t taxed on the earnings until you start making withdrawals (unless you choose an immediate income annuity and withdraw right away).

Interestingly, with both account types, you have a notable option to limit your tax liability. If your contribution to a CD or annuity comes from an IRA or similarly tax-advantaged account, it’s tax-deductible.

Complexity and Risk

Setting up a CD is fairly simple. Although you’ll want to compare account terms, rates, and other factors, you can do so online. Opening the account likely takes less than an hour or so at your bank or credit union of choice.

Annuities are much more complex. Some insurers’ payment requirements are less flexible than others, and virtually all of them charge a variety of fees to set up and/or maintain the account.

CDs have minimal risk if your account is $250,000 or less and won’t be overly affected by market fluctuations if you obtained a favorable interest. Annuity risk varies considerably: A fixed annuity’s biggest hazard is the insurer’s stability, while a variable or indexed annuity is at the mercy of the investments tied to it.

h2: Which is Better, a CD or an Annuity?

The answer to this question comes down to your financial planning needs. For example, a successful investor looking to steadily enjoy retirement in 10 years may find a fixed deferred annuity best suits their needs. Conversely, someone with a specific earnings goal to support future business plans might be better off investing in one or more CDs.

Also, this does not have to be an either-or proposition. At Elite Income Advisors, we can help you put together a tailored financial portfolio that includes CDs, annuities, or any other assets that fit your unique situation.