Understanding the Difference Between CDs and Fixed Deferred Annuities

When it comes to saving and accumulating wealth, there are various options available to individuals. Two popular choices are certificates of deposit (CDs) and fixed deferred annuities. While they share similarities, it’s crucial to assess your goals and financial situation to determine which option suits you best. In this article, we will compare some of the features of CDs and fixed deferred annuities to help you make an informed decision.

Safety of Principal

Both CDs and fixed deferred annuities are considered low-risk investments. CDs are typically issued by banks and are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per insured bank, and per ownership category. In case of bank failure, the FDIC guarantees the CD up to this amount.

On the other hand, fixed deferred annuities are issued by insurance companies and do not have government insurance. The strength of these annuities lies in the claims paying ability of the issuing insurance company. It is important to verify the financial stability of the insurance company before purchasing an annuity. Independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s, and Fitch can provide insights into an insurance company’s financial standing.

Short-term Accumulation

If you have short-term savings goals, such as saving for a down payment on a home or a new car, a CD may be a suitable choice. CDs have maturity periods ranging from one month to several years, allowing you to align your savings timeline with your goals.

Long-term Accumulation:

Fixed deferred annuities are designed for long-term accumulation, particularly for retirement planning. They offer flexibility in accessing your money at a later stage. These annuities can help you accumulate funds for retirement or protect the savings you have already accumulated once you retire.

Interest Return

CDs provide a guaranteed rate of return for a specified period. The interest rate is determined by market conditions at the time of purchase and remains fixed for the entire CD term. However, there is no guaranteed minimum for renewal rates.

With fixed deferred annuities, you lock in a guaranteed interest rate for an initial period. After that, the interest rates may be adjusted annually. These annuities also offer a guaranteed minimum interest rate, irrespective of market conditions.

Tax Savings

If tax implications are a concern, a fixed deferred annuity may offer advantages. The interest earned on CDs is taxable in the year it is earned.

Fixed deferred annuities, on the other hand, allow earnings to accumulate tax-deferred. Taxes on these earnings are only paid when they are withdrawn. This tax deferral can be beneficial, especially for long-term savings like retirement planning. Additionally, fixed deferred annuities may help reduce or eliminate taxes on Social Security benefits. By keeping your taxable income below certain thresholds, you can minimize the amount of Social Security income subject to taxes.


While both CDs and fixed deferred annuities provide access to funds, there are differences in terms of penalties and surrender charges. If you need to withdraw funds from a CD before its maturity date, you may incur an interest penalty ranging from 30 days to six months of interest.

Fixed deferred annuities also offer access to your money, but withdrawals during the surrender charge period are typically subject to surrender charges. However, most companies allow you to withdraw a certain percentage, usually 10%, each year without incurring surrender charges. Once the surrender charge period ends, you can access your money without any penalties. It’s important to note that early withdrawals from annuities before age 59½ may be subject to an additional 10% tax penalty.

Distribution Options at Maturity

At the maturity of a CD, you have the option to take the lump-sum value in cash, renew the CD for the same or a different maturity period, or explore other savings alternatives, such as a fixed deferred annuity.

With a fixed deferred annuity, you can choose to withdraw your money as a lump sum or opt for a lifetime income option. Lifetime income provides a stream of income that you cannot outlive, ensuring financial security during retirement. Alternatively, you can allow your funds to continue accumulating until you require them.

In conclusion, both CDs and fixed deferred annuities have their own advantages and considerations. Assessing your short-term and long-term goals, tax considerations, liquidity needs, and distribution preferences will help you determine which option aligns best with your financial objectives.

This material is not a recommendation to buy or sell a financial product or to adopt an investment strategy.  Investors should discuss their specific situation with their financial professional.  Annuities are products of the insurance industry and are not guaranteed by the FDIC or any other government agency. Early withdrawals may be subject to surrender charges. Withdrawals may be subject to ordinary income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Product, product features and rider availability vary by state.

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