Annuities vs CDs

When people look for a savings alternative for the safe money, one of the first places they look is their bank for certificates of deposits (CDs), and, why not? They’re easy, convenient, and, they are safe. There may not be any argument from financial planners that, if you have a high priority savings goal with a time horizon of ten years or less, CDs are one of the better options. However, if your time horizon is further out, such as retirement, annuities may be a better alternative due to their tax advantages and rate guarantees. Even in the shorter term, annuities can offer some advantages when considered in the context of your overall financial situation.

Bank CD Basics

CDs are time deposits that provide a credited rate of interest on money held for a specified period of time. The credited rate is based on the prevailing interest rate market, typically tied to the rates available on short term Treasuries. CDs are issued with a maturity date which is the period of time your money must remain on deposit in order to receive the full credited rates. CD maturities range from three month to five years, and the credited rate of interest tends to be higher on CDs with longer maturities.

Also, credited rates increase with the size of the deposit. Jumbo CDs, for deposits of $100,000 or more receive higher rates of return than smaller deposits. The interest earned on all CDs is taxable as earned, and it can be paid out as income or left to accrue in the CD. Early withdrawals from CDs will result in an interest penalty that is usually a loss of interest earned for a specified period of time.

CDs are considered to be among the safest of investments because of the system of Federal Deposit Insurance Corporation (FDIC) that provides member banks with coverage on individual deposits up to $250,000 per account, per bank.

Annuity Basics

When comparing annuities and CDs, fixed annuities provide the closest comparison. They are a contract with a life insurance company that offers a long term accumulation account combined with a distribution component that will guarantee a monthly income for life or some specified period of time.

The accumulation account is credited with a fixed rate, and, like CDs the rates are guaranteed for varying lengths of time with higher rates credited for the longer durations. The durations are generally tied to a surrender period during which, if a withdrawal is made that exceeds 10% of the account value, will result in a fee. Each year, the fee is reduced by a percentage point so that it declines to zero to coincide with the end of the surrender period. It is usually at that point when the rate guarantee expires and a new rate is established.

Earnings in fixed annuities are allowed to accumulate tax deferred until they are withdrawn when they are then taxed as ordinary income. Withdrawals made prior to age 59 ½ may also be subject to an IRS penalty of 10%.

Annuities are also considered to be among the safest of investments since they are issued by life insurance companies which are, historically, among the strongest and most stable of all financial institutions. Although they are not covered by FDIC insurance, most states provide insurance coverage through state guarantee funds. These have yet to be used because life insurance companies, unlike banks, are required to carry reserve assets that are sufficient to pay all of their future obligations.

Which is Best for You?

Any consideration of annuities versus CDs as savings alternatives need s to be made based on the same requirements and parameters that individual have for their savings dollars. If the savings goal is a high priority with a long term horizon of more than fifteen years, then the comparison is worth exploring. Here is a quick list of comparative features between the two:

Credited Rates

Bank CDs

Usually tied to short term Treasury securities and sensitive to interest rate movements. Rates can be guaranteed for a period of time after which they are adjusted with no protection against falling rates.


Yields are generated from the investment returns of the life insurer general account and tend to be higher than CDs in the short and long term. Annuities include a minimum rate guarantee which provides protection against sharply declining interest rates.

Tax Deferred Accumulation

Bank CDs

CDs earnings are taxed as ordinary income as received.


Annuity earnings are not currently taxed.

Safety of Principal

Bank CDs

CDs are protected by FDIC insurance, but only up to $250,000 per account owner per bank. FDIC has no direct backing of the U.S. Treasury and its reserves are only a small fraction of what banks have in outstanding obligations.


Annuities are protected by state guaranty funds which are fully funded for up to $250,000 of coverage. Additionally, life insurers are required to maintain a high level of liquid reserves that can be used to pay future obligations.

Access to Funds

Bank CDs

CDs must be held to maturity in order to receive the full amount of interest credited. Early withdrawals can result in the loss of six months of interest.


Annuity accounts can be accessed at anytime without a fee as long as the amount of the withdrawal does not exceed 10% of the account. Withdrawals made prior to age 59 1/2 may also be subject to a 10% IRS penalty. After the surrender period expires funds may be accessed without charge.


Annuities and CDs offer savers the highest amount of safety of their principal. Any comparison beyond that can only be made if they considered in the context of a long term time horizon. For individuals who can benefit from tax savings, annuities may provide the edge as far as competitive rates are concerned. While they both have some restricted access to funds, annuities may offer a little more flexibility for savers who may need early access for an emergency.