Fixed Annuity vs. CD

A fixed annuity and a CD can both serve as conservative ways to earn a fixed rate of return. In this article, we will go over the difference between a fixed annuity vs. CD.

Similarities

There are a few similarities when it comes to a fixed annuity vs. CD. First, they both have a guaranteed rate of return set for a predetermined period of time. Second, they offer very little exposure to stock market risks.

Differences

There are four key differences between fixed annuities and CDs. First, is the timing of taxation. A fixed annuity offers tax deferral. Meaning you only pay taxes when you begin withdrawals. On the other hand, a CD has its interest taxed yearly. Second, is their level of liquidity. Liquidity is how easily an asset can be converted into cash. With a fixed annuity you will have a surrender charge period, typically between 3 and 10 years. During this time withdrawals are subject to penalties. However, some fixed annuities will allow you to draw up to 10% of your policy value without charges. Alternately, a CD comes with an interest penalty. If you withdraw before a CD matures it means you will pay a penalty worth several months of interest.

Third, is related to the interest rate period. With a fixed annuity you have an interest rate set for an initial period, but after that period it may fluctuate. Whereas with a CD the interest rate is guaranteed for a term. But after that term expires you can renew it at a new rate. Fourth, are your withdrawal options. With a fixed annuity you have several withdrawal choices. You can choose to take a lump sum or annuitize and receive regular payments. With a CD your balance is returned to you in a lump sum.

Pros and Cons of Fixed Annuities

There are both positive and negative aspects of investing in a fixed annuity. First, are the pros. A fixed annuity offers you tax deferred growth, potential for life long income, and suits a long time horizon. The cons include the potential for penalties for early withdrawal and potential to lose the policy if the issuing insurance company goes under.

Pros and Cons of CDs

CDs also come with good and bad traits. Some of their benefits include the fact that they have higher liquidity than annuities. Second, they support short term growth. Lastly, they have either FDIC or NCUA protection. Some downsides include the fact that they have no option to create an income stream. Additionally, they do not provide tax deferral.

Factors in Choosing a Fixed Annuity vs. CD

There are many factors to take into consideration when choosing a fixed annuity vs. CD. For example, if you have a short time horizon a CD would be best for you. Whereas if retirement planning is your goal, a fixed annuity would be better. Meet with a qualified agent and financial planner who can help you analyze your situation and see what would work best for you.

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