Annuities versus certificates of deposit

Annuities are insurance products designed to help you save for long-term goals like retirement by offering guaranteed growth and a potential stream of income. CDs, on the other hand, are bank accounts meant for short-term savings that pay a fixed interest rate for a set period.

Key takeaways

• Diversification helps create a stable retirement portfolio and often includes guaranteed, interest-bearing options.

• Two common choices are annuities and CDs; the annuity most similar to a CD is a fixed annuity multi-year guaranteed annuity (MYGA).

• Both offer stability but differ in structure, benefits, tax treatment, and how they fit into your broader financial plan.

With people living longer and traditional retirement income sources declining, almost half of working Americans are worried about having guaranteed income in retirement.¹ A CD or annuity can provide added stability when it matters most. If you’re deciding between them, it helps to understand that both can offer financial security — just in different ways. The right choice depends on your timeline, income needs, and how easily you’ll want to access your money.

Annuities create a reliable stream of income in retirement with the added ability to help protect and grow retirement assets while a CD is more ideal for short-term goals. Taking time to learn can help you choose the option that best fits your financial plan.

How they differ

1. Who offers it

CDs are issued by banks or credit unions and insured up to $250,000 per depositor per insured depository institution by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Annuities are issued by insurance companies and are not FDIC insured.

2. Safety and protections

Both are considered conservative options, but annuity guarantees depend on the issuing insurer’s financial strength and claims-paying ability.

3. Liquidity and early-withdrawal penalties

Liquidity refers to how easily an investment can be converted to cash. CDs generally offer more liquidity due to shorter terms, though there are still early withdrawal penalties. Annuities are typically less liquid and may include surrender charges, but many fixed annuities allow free withdrawals of up to 10% per year. Withdrawing from either option early can reduce earnings, and annuities may also trigger taxes or IRS penalties if taken before age 59½.

4. Taxes

CD interest is typically taxed each year, while annuity earnings grow tax-deferred until you withdraw them. CDs held in an IRA also receive tax deferral, and early withdrawals from annuities in qualified accounts may trigger penalties.

5. Rates/returns

When comparing annuities versus CDs, look at both the interest rate and how long it’s guaranteed. Fixed annuities, including MYGAs, and CDs both offer guaranteed rates for a set term. Fixed annuities may pay higher rates than CDs over longer periods, but rates can change after the guarantee ends. Instead of focusing only on headline rates, consider the guarantee period, renewal risk, and how each option fits into your retirement strategy.

6. Complexity/fees

Annuities can be more complex than CDs and may include fees such as administrative charges or optional rider fees for added features. They’re typically sold through financial advisors, who may be compensated by insurer-paid commissions or client-paid fees.

Note: When comparing CDs and fixed annuities, it’s important to remember that CDs are FDIC insured up to $250,000 per depositor per insured depository institution (subject to FDIC rules), while fixed annuity guarantees are backed by the issuing insurance company. CDs are typically used for short-term savings needs, while annuities are typically used for long-term savings needs such as retirement. CD rates are subject to change and availability, and CDs may be liquidated in the secondary market subject to market conditions. Generally, CDs may not be withdrawn prior to maturity.

Annuities versus CDs

With only 30% of people rating their financial health as very good or excellent, it’s more important than ever to ask the right questions and seek guidance from trusted sources.²

If you’re comparing annuities and CDs, there’s a good chance the annuity you’re looking at is a fixed annuity, or MYGA. CDs tend to work well for short-term goals, while anything beyond five years may call for an investment strategy that aligns with your long‑term goals and comfort with risk. Taking time to understand the differences between the two can help you choose the option that best supports your retirement plan.

What is a CD?

A certificate of deposit (CD) is a simple, straightforward product with minimal or no fees if held to maturity. It is essentially a savings account that pays a fixed interest rate for a set period of time. In exchange for leaving your money untouched for months or years, CDs typically offer higher rates than regular savings accounts. They’re considered low risk because deposits are insured by the FDIC or NCUA up to $250,000 per account and are often used for short‑ to mid‑term goals like a down payment or large purchase.

What is an annuity?

An annuity is a contract with an insurance company in which you pay a lump sum or series of premium payments and, in return, receive a regular stream of income. Think of an annuity as an insurance product designed for long-term goals like retirement. Depending on the type, they may offer a guaranteed interest rate for a set period and may provide options to convert value into guaranteed income to lower the risk of outliving your savings.

Annuity payments can start right away or within one year (immediate income annuity), or at some point in the future (deferred income annuity). These come in fixed, variable, and fixed indexed forms, each offering different terms, benefits, and risks. Deferred annuities operate in two phases: the accumulation phase, when your funds grow within the contract, and the income or annuitization phase, when that accumulated value is converted into a steady stream of payments indexed.

Fixed versus indexed vs variable annuities

Which annuity is most like a CD?

The annuity most comparable to a CD is a fixed annuity, often referred to as a MYGA. Fixed deferred annuities and CDs both provide guaranteed fixed interest rates on your principal and both accrue interest over time while imposing early withdrawal penalties. However, a MYGA differs from a CD in that it is an insurance contract rather than a bank product, offering tax-deferred growth and relying on the financial strength of the issuing insurer rather than FDIC/NCUA protection. When a fixed deferred annuity matures, you can withdraw your money in one lump sum or select a lifetime income option that will provide a steady flow of income for the rest of your life.

Annuities versus CDs: Which is right for you?

More than 70% say that inflation or cost of living had a significant personal impact on them in the past year.³ So before deciding if an annuity or a CD is right for your financial goals, it’s a good idea to use a retirement calculator to determine where you stand in relation to your personal finance and retirement plan. Annuities and CDs are both savings vehicles that are built for different financial goals, so the right choice depends on how long you can invest and how accessible your money must be.

• If you need the money within 0–24 months: A CD or high-yield savings account may make sense. Both are designed to help protect your principal and provide predictable returns for specific, short-term financial goals, which can feel reassuring when markets are uncertain. CDs are well-suited for conservative investors or those nearing retirement who can’t afford the risk of losing their capital.

• If you want multi-year guaranteed growth and can leave funds untouched: A MYGA/fixed annuity may fit. Although fixed annuities may offer higher interest rates than CDs, they do offer tax-deferred growth if you need stability for retirement planning and long-term goals.

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If you want guaranteed lifetime income later: Annuity-based solutions may help turn savings into reliable lifetime income — a key benefit not available with CDs.

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How to compare a CD to an annuity in 5 steps:

1. Define your timeline: CDs work best for short‑ to mid‑term needs, while annuities are designed for longer timeframes or lifetime income.

2. Consider how it fits your plan: Think about how each option supports your short‑ and long‑term goals and complements your overall portfolio.

3. Understand your risk tolerance: CDs offer low risk, fixed returns, while annuities vary by type and risk level.

4. Review your financial situation: Account for liquidity needs, emergency savings, and other obligations.

5. Talk to a financial advisor: An advisor can help you decide which option best aligns with your goals and risk tolerance.

See how they compare in this hypothetical example: Assume $50,000 is invested for five years. A CD paying 4% may be taxed annually, so the after-tax ending value depends on your tax bracket and how the CD interest is reported. A fixed annuity paying 5.2% grows tax deferred, but taxes may be due when you withdraw earnings. For example, using a 24% tax bracket and assuming the full amount is withdrawn at the end of year five, the CD’s after-tax value would be about $58,076, while the annuity’s after-tax value would be about $60,962. Actual results depend on rates available, contract terms, surrender charges, and tax rules.

Alternatives to annuities and CDs

Of course, CDs and annuities are just two of your retirement savings options. Others include:

• Traditional savings accounts: A simple, low-risk option, though typically offering lower returns than CDs or annuities.

• Mutual funds: Opportunity to invest in a professionally managed, diversified mix of assets and may offer higher return potential with greater risk.

• Stocks: Offer the highest growth potential but come with greater market volatility and risk of loss.

• Bonds: A middle ground between the safety of CDs, fixed annuities, and riskier stock investments.

  When you purchase bonds, you’ll receive regular interest payments and a return of the bond's face value at maturity.

Guardian can help

Before purchasing an annuity or CD, consult a financial advisor about the potential benefits and risks of each. If you don’t have someone to speak to about your financial goals, a Guardian financial advisor can explain your options and help you decide what makes sense for your retirement plan.

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Podcast spotlight

We break down in simple terms what an annuity is and how it could be a helpful addition to your long-term financial strategy.