Which Is Better CD or Annuity?

If you're thinking it's time to start stashing some money away for a rainy day or a sunny retirement, two available investment options are certificates of deposit (CDs) or annuities. In both cases, you'll get a better interest rate than a regular bank savings account or even that jumbo pickle jar you hide under the porch. Unlike savings accounts, however, you won't be able to drop by the ATM six times a day, as these instruments include substantial penalties for premature withdrawal.

Identification

Annuities are typically sold by life insurance companies. They allow you to invest a regular monthly amount which earns interest on a tax-deferred basis. At the end of the period, the insurance company makes regular monthly payments to you, with the amount based on your age and the accumulated annuity value. CDs are sold by banks. You provide the bank with a specific amount of money in exchange for a fixed interest rate. At the end of the term, the bank gives you your initial investment plus interest.

Similarities

Both CDs and fixed annuities (meaning they offer a fixed interest rate for the life of the annuity) are considered safe investments. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for amounts up to $250,000, while annuities are backed by the financial strength of the insurance company. Even if you select a variable annuity, which invests in instruments like stocks and bonds, you are guaranteed to receive at least a minimum amount of interest.

Differences

CDs are offered for relatively short time periods like six months or a year, while annuity terms typically last until age 65 when the funds are then used for retirement. Annuity interest is tax-deferred, meaning you won't pay taxes on it until you begin to receive payments. On the other hand, CD interest is taxable as it accrues. Because annuities are life insurance products, they typically don't have to go through the probate process upon your death. Annuities also may offer higher interest rates than CDs.

The Right Choice

Whether you choose to invest in an annuity or CD has a lot to do with how quickly you need the money. If you're saving to buy a home, a CD may be the better choice, while annuities are better for long-term goals like retirement. If taxes are an issue for you, you might want to select the annuity to take advantage of the tax deferral feature.

About the Author

Chris Joseph writes for newspapers and online publications, covering business, technology, health, fitness and sports. He holds a Bachelor of Science in marketing from York College of Pennsylvania.