by | Sep 25, 2019 | Annuities

Last Updated: September 25, 2019

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A fixed annuity is an annuity contract with a life insurance company. Conversely, a CD (certificate of deposit) is issued by a bank. There are similarities and differences between both. In this article, 4 experts weigh in on a fixed annuity versus a CD (certificate of deposit).

A Fixed Annuity Usually Pays Much Higher Guaranteed Rate And It Offers Tax Deferral

“Americans love certificates of deposit. But fixed-rate annuities, which function like CDs, usually pay much higher guaranteed rate. And they offer tax deferral.

CDs have one main advantage over annuities: they’re insured by the FDIC. But I think it’s a tiny advantage, all things considered. Fixed annuities are guaranteed by life insurance companies, which are strictly regulated by the states to ensure solvency. And fixed annuities are also protected by state guaranty associations up to certain limits.

Fixed-rate deferred annuities are also called multi-year guarantee annuities or CD-type annuities. Like CDs, they provide a set, guaranteed interest rate for a stated period of time, usually three to 10 years.

As with a CD, there’s no sales charge. Whether you deposit $10,000 or $100,000 in a fixed annuity, all of it goes to work for you immediately.

Here are the main ways fixed-rate annuities beat CDs.

Substantially higher rates. Fixed annuities usually pay more than CDs with comparable terms.

Tax-deferral. All CD interest is subject to federal and state income tax annually, even when it’s reinvested and compounded in the CD. A fixed annuity is tax-deferred. You won’t receive an annual 1099 and you won’t pay tax on the interest until you withdraw it. At the end of the annuity’s initial guarantee period, you may renew it for another term or roll it over into another annuity to continue deferring taxes.

Tax deferral doesn’t apply when you hold an annuity in an IRA or another retirement account because those accounts are already tax-advantaged. Since you get a guaranteed, competitive rate, they’re still a top choice for the portion of your retirement assets you want to protect and shelter from market risk.

For certain retirees, lower taxes on Social Security benefits. About 40 percent of retirees who receive Social Security pay taxes on at least a portion of their benefits. By reducing eligible income, you may be able to cut the amount of your Social Security benefits subject to income taxation. Someone who ditches their taxable CD and purchases an annuity reduces the income that may trigger the tax on Social Security benefits. Most of the 40 percent of recipients who pay taxes on their benefits will profit from this strategy, but high-income retirees won’t.

Greater penalized liquidity. Almost all banks impose substantial penalties on all early withdrawals from CDs. Most fixed-rate annuities let you withdraw interest or up to 10 percent of the value annually without penalty, points out. You will, however, have to pay income taxes on any interest withdrawn. Additionally, if you make an early withdrawal before age 59½, you’ll also owe the IRS a 10 percent penalty on withdrawn interest earnings.”

Ken Nuss, CEO, AnnuityAdvantage

CDs Are Better Than Annuities

 “In general, CDs are better than annuities. Typically annuities are for much longer terms (years) and have very strict withdrawal rules. The reason why they were popular is that they typically offered higher rates than CDs. However, with the inversion of the yield curve, long term debt (such as annuities) has become less attractive as shorter-term CDs have increased in rates. Today, the only advantage of an annuity is the tax deferment, since annuity earnings are not taxable until withdrawn.”

EdgarRadjabli, CEO. Loan Doctor

CDs Are Issued By Banks And a Fixed Annuity Is Issued By An Insurance Company

“Fixed deferred annuities and CDs are very similar, but CDs are issued by banks and fixed annuities are issued by insurance companies. They both pay a fixed rate of return for a specific period of time although fixed annuities normally pay a higher interest rate. Neither fixed annuities nor CDs have any fees or costs. Many people are misinformed that annuity fees are too expensive, but that is when it comes to variable annuities.

A fixed annuity is tax-deferred so you don’t have to send anything to Uncle Sam each year and your money compounds and has a higher balance than a non-tax deferred account. Another benefit is that a fixed annuity usually has a penalty-free withdrawal privilege like 10% per year of the value or interest at any time. Some people buy a fixed annuity and have the interest sent to them starting thirty days after issue and every thirty days after that. Others may buy a five year fixed annuity, not touch it for three years and then take the interest that it earned over that three year period all at one time. You don’t have that type of flexibility with a CD.

One of the positives of a CD compared to a fixed annuity is that it is federally insured currently up to $250,000 if something were to happen to the bank. Fixed annuities are insured at the state level and the amount of insurance is different in each state. For example, in PA, they will guarantee up to $100,000 per contract and $300,000 per company if you own multiple contracts. Again, this is a guarantee at the state level where CDs are guaranteed at the federal level.

Fixed annuities allow you to name a primary and contingent beneficiary should you pass away and therefore the money bypasses probate and goes right to your heirs listed in the contract. With a CD, the money becomes part of your estate unless it is an IRA CD where you name a beneficiary.

A fixed annuity also has the option of being annuitized where you convert the contract into a payout time frame that you choose which can be guaranteed for lifetime payouts or shorter periods of time, depending on your needs. Conversely, a CD is just an investment that earns interest and matures and you can live off the money, but there is no guarantee that you won’t run out of money in your lifetime.

Annuitizing a fixed annuity can also help with Medicaid when it comes to asking the government to pay for your care after you are out of funds. Once an annuity is annuitized, it can’t be changed so you can take a fixed annuity and annuitize it over a twenty-year period. If you then go into a nursing home, they can’t take the value of the annuity since it can’t be changed and the most that they can take is the monthly payment. If you are in the nursing home and pass away three years later, the remaining seventeen years worth of payments would still go to your beneficiaries so it is a way to try to preserve some of your estate.”

Richard P. Sabo, CFS, RFC, Owner/Financial Advisor, RPS Financial Solutions 

 It Depends on Your Specific Financial Goals

“Choosing between the two savings vehicles depends on your specific financial goals.

If you’re interested in savings for the long-haul (i.e. retirement), then a deferred annuity may be a better option. The best part about a deferred annuity is that you are earning money in three ways: interest on the principal amount, interest on interest, and interest on tax savings. The money you stow away in a deferred annuity grows tax-free until retirement. A deferred annuity is a “set it and forget it” type of investment opportunity. The main downsides of a deferred annuity are the fees. There are annual fees, deposit fees, mutual fund management fees, and insurance fees.

Access to your money will be restricted as well. With a deferred annuity, your money is locked away for at least multiple years. The annuity then goes into a surrender period, which gives limited access at a fee. This fee is usually 7% or 15%. Once the surrender period is over, the money can be withdrawn without a penalty. You can either receive the money in a lump sum or monthly payments. Also, the IRS will conduct a penalty if you make a withdrawal before you turn 59.5-years-old.

Those who are looking for a more flexible, short-term savings vehicle who don’t mind lower returns, may want to choose a certificate of deposit. With a certificate of deposit, you choose the commitment. Agreements last anywhere from three months to a decade. There are a variety of CDs available with various perks including those with low or no withdrawal penalty or interest rates that decrease over time.”

Nia Simone, Personal Finance Writer, Money Done Right

As with any investment, there are advantages and drawbacks to a fixed annuity and a CD. Depending on the investor, either savings vehicle could be a good investment choice. If you are interested in fixed annuities or CDs, take into account what these experts have highlighted, do your due diligence, and before investing, consult a financial professional.


Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.