CD vs. Annuity: Know the Difference

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The most fundamental difference between a CD and an annuity is when the returns are paid to you and in what form. An annuity generally pays you an income stream over time, whereas a CD will pay you a lump sum when it matures.”-Investopedia.com

What is a CD?

A Certificate of Deposit (CD) is a savings account offered by banks and credit unions that pays a fixed interest rate for a fixed period. When an investor opens a CD, they agree to deposit money into the account and not withdraw it until a specific date or the maturity date of the deposit. 

During the term of the CD, the investor will receive interest payments on their deposited funds. At the end of the term, the customer can either withdraw the money or roll the CD over and extend the term, meaning the investor will have access to the funds at a later date. CDs are a low-risk, low-return way of investing, meaning investors will receive a steady but low rate of return.

What is an annuity?

An annuity is a financial product that provides the investor with a steady stream of income payments, either for a limited period of time or for the remainder of the investor’s life. When an annuity is purchased, the purchaser pays either a lump sum or a series of payments over time. In return, receives regular, predetermined payments, usually monthly, throughout the contract. 

Annuities can either be fixed, variable, or indexed, and the rate of return, or payout, that the investor receives is based on the type of annuity selected. Fixed annuities provide a fixed rate of return and protect the principal investment, while variable annuities provide a variable rate of return, and indexed annuities provide a rate of return based on a particular index, like the S&P 500. Annuities can be used as a retirement strategy, as the income generated from the annuity can help to supplement other income sources, such as Social Security or pensions.

What is a CD rate for, and why is it important to investors?

CDs and annuities offer a low-risk, low-return way of investing [1]. CDs typically offer a guaranteed rate of return for a specified period, which is essential for investors who are looking for a safe, predictable rate of return. Finding the best CD rates in the market will affect your investment return. On the other hand, fixed deferred annuities generally provide a guaranteed interest rate for an initial period, and then the rate may be adjusted each year . 

A fixed deferred annuity also provides a minimum guaranteed interest rate, regardless of market conditions. Additionally, earnings on CDs are taxable in the year they are earned, while yields on fixed deferred annuities are tax-deferred until the money is withdrawn. This makes annuities a good choice for investors who are looking to minimize their tax burden.

References:

[1] CDs vs. Annuities – Investopedia

[2] Annuities vs. CDs | A Comparison of Both Products

[3] Fixed Deferred Annuity vs. CD – New York Life Insurance

What is an annuity rate?

An annuity rate is a percentage by which an annuity grows each year. Annuity rates are determined by the insurance company issuing the contract and guaranteeing a stated interest rate for a set period of time. Fixed income and fixed index annuities are a little more complicated as they do not have a fixed interest rate like other types of annuities. 

MYGAs are fixed annuities that guarantee a set interest rate for any term between two and 20 years. The best MYGA rate is 5.50% for a 10-year surrender period, 5.70% for a seven-year surrender period, 5.65% for a five-year surrender period, 5.50% for a three-year surrender period, and 4.30% for a two-year surrender period [2]. Annuity rates are typically higher than the interest rates offered by banks for savings accounts and certificates of deposit, making them an attractive option for investors looking for a secure and reliable return on their investment.

References:

[1] Best Fixed Annuity Rates | Current Rates For February 2023

[2] The Best Annuity Rates For February 2023

[3] What is an Annuity Rate? — ImmediateAnnuities.com

Conclusion: CD, Annuity, or both?

CDs and annuities offer investors a steady income stream but on different terms. CDs provide a lower rate of return but come with a guarantee of the principal investment, while annuities can provide a higher rate of return, but the investor takes on more risk. Ultimately, which one is best for an investor depends on their individual needs and situation. Before investing, investors should understand each product’s risks and benefits and decide which is the best fit for their goals.

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