Annuity vs CD: Which Is Better for Your Safe Money?
Compare fixed annuities to certificates of deposit. Understand the trade-offs for your conservative savings.
Key Takeaways
- 1Both offer guaranteed returns with low risk
- 2CDs are FDIC insured; annuities backed by insurance company
- 3Annuities offer tax-deferred growth; CD interest is taxed annually
- 4CDs have shorter terms; annuities often 5-10 year surrender periods
- 5MYGAs (Multi-Year Guaranteed Annuities) are most comparable to CDs
- 6CDs more liquid; annuities have surrender charges
- 7Consider tax bracket when comparing
CDs vs Annuities: Conservative Savings
Both CDs and fixed annuities are considered safe, conservative investments. The right choice depends on your tax situation, time horizon, and liquidity needs.
- Both offer guaranteed rates of return
- Both protect your principal
- Key difference: tax treatment and liquidity
- MYGAs are the annuity type most similar to CDs
Certificates of Deposit (CDs)
CDs are time deposits offered by banks and credit unions.
- **FDIC insured**: Up to $250,000 per depositor, per bank
- **Terms**: Typically 3 months to 5 years
- **Rates**: Currently 4-5% for best rates
- **Tax treatment**: Interest taxed annually as ordinary income
- **Early withdrawal**: Penalty typically 3-12 months interest
- **Liquidity**: Better than annuities - smaller penalties
Fixed Annuities / MYGAs
Multi-Year Guaranteed Annuities (MYGAs) are the closest annuity equivalent to CDs.
- **Insurance company backed**: Not FDIC insured, but state guaranty associations provide some protection
- **Terms**: Typically 3-10 years
- **Rates**: Sometimes 0.25-0.75% higher than CDs
- **Tax treatment**: Tax-deferred until withdrawal
- **Surrender charges**: Often 5-10% in year 1, declining annually
- **Age 59½ rule**: 10% IRS penalty if withdrawn before 59½
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CD vs Fixed Annuity Comparison
Key differences at a glance.
| Feature | CD | Fixed Annuity / MYGA |
|---|---|---|
| Insurance | FDIC (up to $250K) | State guaranty (varies) |
| Rates | Good | Often slightly higher |
| Tax on growth | Annual | Deferred |
| Early withdrawal penalty | Months of interest | 5-10%+ surrender charge |
| IRS penalty before 59½ | None | 10% penalty |
| Terms | 3 months - 5 years | 3-10 years |
| Best for | Short-term, need liquidity | Long-term, tax deferral |
Which Should You Choose?
Consider these factors when deciding.
- **Choose CD if**: Need liquidity, short time horizon, want FDIC insurance
- **Choose MYGA if**: 5+ year horizon, high tax bracket, want tax deferral
- **Consider both**: Ladder CDs for liquidity, MYGA for long-term
- **Tax bracket matters**: High bracket = more benefit from tax deferral
Tax Comparison
In 32% tax bracket: 5% CD yields 3.4% after tax. 5% MYGA grows at full 5% until withdrawal. Over 10 years, MYGA could be worth 10-15% more.
Beyond CDs and Annuities: Gold IRA
CDs and fixed annuities are safe but offer limited growth. Consider diversifying with a Gold IRA.
- Gold provides inflation protection CDs/annuities don't
- Tax-deferred growth like annuities
- No surrender charges
- Physical asset, not insurance company promise
- Can balance CD/annuity stability with gold growth potential
- Augusta Precious Metals explains Gold IRA options
Frequently Asked Questions
1Are CDs safer than annuities?
CDs have FDIC insurance which is generally considered more reliable than state guaranty association protection for annuities. For amounts under $250,000, CDs are arguably safer.
2Can I lose money in a fixed annuity?
Generally no, unless the insurance company fails. State guaranty associations provide some protection (typically $250,000-$500,000) but it's not as robust as FDIC.
3Why would anyone choose an annuity over a CD?
Tax deferral. If you're in a high bracket and won't need the money for 5+ years, the tax-deferred growth can result in more money over time.
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