Fixed Annuity vs. CD: Which Should You Invest In?

Fixed annuities and certificates of deposit (CDs) are both low-risk savings vehicles that provide guaranteed returns, but they work in different ways. A CD locks in funds for a set period at a fixed interest rate, with penalties for early withdrawal. A fixed annuity, offered by insurance companies, provides tax-deferred growth and often guarantees income payments in retirement. When comparing a fixed annuity to a CD, the key differences lie in liquidity, taxation and the role each can play in long-term financial planning.

A financial advisor can help you assess your financial needs and determine whether an annuity or other assets belong in your portfolio. Connect with a financial advisor for free.

Fixed Annuity vs. CD: What Are They?

Before comparing a fixed annuity to a CD, it helps to first understand how each product works, including key features and the way they generate returns.

What Is a Fixed Annuity?

A fixed annuity is an insurance product in which you deposit funds and receive a guaranteed rate of return for a specific number of years or the rest of your life. Unlike market-based investments, fixed annuity returns are not tied to stock or bond performance. This makes annuities appealing for those seeking predictable returns.

Contributions to a fixed annuity grow tax-deferred, meaning earnings are not taxed until withdrawals begin. Annuities are often used to generate a stream of income in retirement. However, tapping funds too early can trigger surrender charges.

What Is a CD?

A CD is a savings product offered by banks and credit unions that locks in money for a fixed term, usually from a few months to several years, in exchange for a guaranteed interest rate. The Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) insure CDs up to applicable limits, adding an extra layer of protection.

Interest is typically paid monthly, quarterly or at the end of the term. Withdrawals before maturity usually result in penalties. CDs are best suited for short- to medium-term savings goals where guaranteed returns and principal protection are priorities.

Fixed Annuity vs. CD: Primary Differences

While fixed annuities and CDs share some surface-level similarities as low-risk savings options, they differ in several meaningful ways. Looking at how they grow, how accessible the funds are and what protections each offers helps clarify where each product fits into a financial plan.

Growth and Tax Treatment

Fixed annuities grow on a tax-deferred basis, meaning earnings are not taxed until withdrawals begin. CDs, by contrast, generate taxable interest each year, even if funds remain untouched until maturity. This distinction can affect long-term accumulation, especially for individuals in higher tax brackets.

Liquidity and Access to Funds

CDs generally allow early withdrawals with penalties, usually costing a portion of the earned interest. Fixed annuities, however, often carry surrender charges if money is taken out before the contract period ends. Some annuities offer partial withdrawals without penalties, but rules vary by contract.

Guarantees and Protections

Federal insurance through the FDIC or NCUA backs CDs up to legal limits, providing strong principal protection. By comparison, insurance companies support fixed annuities. State guaranty associations also offer limited protection to annuity holders if the insurer fails.

Role in Financial Planning

CDs are typically used for short- to medium-term goals where predictable returns and safety are priorities. Fixed annuities, on the other hand, are often positioned as long-term retirement tools. Annuities offer guaranteed growth and the potential for lifetime income streams.

Which Should You Invest In?

Choosing between a fixed annuity and a CD often comes down to time horizon, financial goals and tax considerations.

A fixed annuity may suit those who are focused on retirement income or want to defer taxes on investment growth until later years. It can also appeal to individuals who value a predictable income stream, especially if they are less concerned about immediate liquidity. For example, you might choose a fixed annuity at age 60 if you want to lock in a guaranteed payout to supplement Social Security once you retire.

CDs, by contrast, work well for short- to medium-term savers who want guaranteed returns without committing funds for decades. They are often used to protect funds earmarked for near-term goals, such as a down payment on a house or a future tuition bill.

If you know you’ll need $20,000 for a child’s college expenses in three years, you could place those funds in a three-year CD to preserve principal while earning steady interest. Because CDs are insured by the FDIC or NCUA, they may also feel more secure to those who prefer federally backed protection.

For some investors, a combination can make sense. CDs can cover shorter-term needs, while fixed annuities can play a role in long-term retirement planning. The right choice depends on whether the priority is immediate accessibility, tax advantages or future income security.

Bottom Line

Deciding between a fixed annuity and a CD often comes down to balancing stability, time commitment and future goals. Each offers guaranteed returns, but one emphasizes short-term savings while the other can provide tax-deferred growth and structured income over the long run. To choose, consider how soon you’ll need access to your funds and whether predictable payouts in retirement are a priority.

Money Management Tips

A financial advisor can help you pick investments that align with your time horizon, risk tolerance and goal. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Instead of keeping all your emergency savings in one place, divide them across accounts with different levels of accessibility. For example, hold a portion in a high-yield savings account for immediate needs, and place the rest in short-term CDs or a money market fund where it can still earn a return without taking on excessive risk.