Investing doesn’t have to be unpredictable. Although buying volatile assets like stocks is a common long-term strategy, there are ways to build a respectable return without taking on significant risk. For instance, products like certificates of deposit (CDs) and annuities offer a safe, easy, and reliable way to collect guaranteed payouts on your savings. 

Thanks to their assurances and ease of access, CDs and annuities remain some of the most popular picks for investors — but they aren’t interchangeable assets. Review what separates an annuity versus a CD so you’re clear on which investment suits your portfolio. 

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Is a CD an annuity? The key differences between CDs and annuities

CDs aren’t annuities — the former are issued by banks, while the latter are issued by insurance companies. 

With CDs, you earn interest on your deposit as long as they’re in the account. But you can’t withdraw money anytime from a CD. You lock away a lump sum deposit in your CD until the pre-agreed timeframe expires.¹

Although you lose liquidity in this arrangement, you’ll reap higher interest payments. When your CD matures,  you can choose to withdraw your principal deposit plus all the interest rewards in one transfer. 

With an annuity, you send either a lump sum payment or a steady stream of deposits to an insurance company over an accumulation phase in exchange you earn interest on your deposit and can elect to receive for payments in the future, which can be paid out in a lump sum or regular withdrawals once the distribution phase starts. 

There are many types of annuities, some offering price exposure to assets similar to mutual funds and others providing holders with guaranteed interest returns. Of these different annuity contracts, fixed annuities are the most similar to CDs because both offer investors a pre-set interest rate on their deposit. But even fixed annuities distinguish themselves from CDs with features like access to customizable benefits, longer-term durations, and higher average interest rates.⁴

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Why are fixed annuity rates higher than CDs?

While interest percentages for CDs and fixed annuities vary between providers, the latter category tends to offer more attractive rates. An annuity’s higher annual percent yield (APY) is primarily due to its longer time horizon versus CDs. It’s rare for investors to lock money away in a CD for over 10 years, but it’s common to hold annuities for a decade, if not longer. 

An annuity’s extended duration gives your investment extra time to grow, increasing the odds an insurance company can earn more on your deposit through its investment process. 

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Annuities versus CDs: Benefits and drawbacks 

Fixed annuities and CDs are powerful passive income generators, each with unique strengths and weaknesses. Take a closer look at the following categories to fully grasp the differences between these products. 

Tax implications

From a tax perspective, annuities are the more attractive choice. Fixed annuities are usually tax-deferred products, meaning you’re only responsible for paying taxes on your earnings once you start taking withdrawals. While your annuity investment sits during accumulation, you can relax and let your earnings grow without taking out funds for income tax. 

CD holders don’t get the same tax deferral with their interest payments. Instead, anyone with a CD must pay the IRS income tax on their interest annually. 

Term duration

Aside from immediate annuities, expect to lock away funds for longer with an annuity versus a CD.  And typically, annuities have a three-year minimum duration, but can be as long as 10 years (and in some cases longer). 

By comparison, it’s rare to find banks or credit unions offering CD terms over 10 years, and some CDs expire within just a few months. 

Although the longer timeframe decreases an annuity’s liquidity, it often translates to greater growth and higher average interest rates.

Fees

Banks don’t collect fees for opening, maintaining, or closing a CD, and they only charge a penalty if you withdraw funds early. 

Annuities typically have more complex fee schedules that depend on your plan and whether you add optional benefits called riders. You’ll need to spend more time scanning an annuity’s fees to understand its actual cost. 

If fees are a concern, consider working with a digital annuity provider like Gainbridge^®. Without intermediaries or high administrative overhead, Gainbridge^® slims down your fee exposure, putting more money back in your hands.

Customizability 

Simplicity is a pro and con for CDs. While a CD’s straightforward structure makes it easy to understand and set up, there’s less room for flexibility. Annuities offer more ways to personalize your long-term funds. 

You choose your investment’s risk profile and payment structure, such as a lump-sum deposit or recurring contributions. And you decide whether to include riders for additional protections, like inflation adjustments, death benefits, and guaranteed minimum lifetime withdrawals. If you want to customize your retirement plan, you may have more flexibility with annuities. But, of course, with an annuity you don’t have the flexibility that a CD may offer you with shorter terms which can mean easier access to your money.

Payout options

With a CD, you’re limited to a single payout plan, where you receive your principal plus interest at the end of your term. Not so with annuities. Rather than a one-time transaction after accumulation, withdrawing from an annuity can take place over multiple years. You’ll pull money from your annuity at maturity, monthly, quarterly, or annually, depending on the particular annuity contract. 

Some annuities pay you for a set timeframe or until your funds run out, but a few contracts guarantee lifetime payouts. And it’s typical to have a 10% penalty-free withdrawal available prior to the annuity’s maturity.

Security

CDs and annuities have high safety profiles but don’t qualify for the same insurance protections. For instance, if a CD comes from a bank with FDIC insurance, it offers federal protection in case of a default of up to $250,000 per person. CDs from credit unions don’t have FDIC coverage, but they have a similar form of insurance through the National Credit Union Share Insurance Fund (NCUSIF). 

An annuity doesn’t qualify for either of these federal protections, and it derives its security from the issuing company’s reputation and creditworthiness. 

Accessibility 

Thanks to their straightforward design and wide availability, CDs are some of the easiest financial assets to buy. While annuities aren’t difficult to open, you may find them complicated by comparison due to structure, fees, and customizable features. However, with advances in digital annuities on platforms like Gainbridge^®, setting up an annuity is getting simpler. The process is entirely online, plus Gainbridge^® removes the middleman — so no commission, administrative, or maintenance fees.

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Annuity or CD: Which is better for your retirement savings?

When debating between these financial instruments, consider how quickly you want access to your savings. If you want to access it soon, you may want to consider a CD — they’re simple, safe, and let you capitalize on a guaranteed interest payout. But if you’re not worried about immediate liquidity and want to build a solid income stream for the future, you should consider a fixed annuity. Not only can fixed annuities guarantee compounding returns over decades, they tend to provide higher interest returns versus CDs thanks to their longer duration. Annuities also offer tax deferral benefits to avoid paying IRS payments before withdrawals, and you can add riders to enjoy lifetime returns, inflation adjustments, and medical care assistance.