Annuity Vs CD

Annuity Vs CD: Which is Best?

Annuity or CD? That answer depends entirely on what you have planned for the money.  There are advantages and disadvantages to both methods of saving.  And of course there are hybrid CD Type Annuities that offer Higher Yield’s than CD’s, with the tax deferred advantages of an Annuity.

A CD is better if you will need the money in a year or two.
An Annuity may make more sense if you have a medium range investment horizon, of five years or more.
An annuity is a safe investment but a CD will offer fewer restrictions if you will need all your principal back after the investment term.
If you want to protect and grow your capital for a few years, then turn that capital into an income stream, a deferred annuity is the perfect choice.

If you have a longer term investment perspective, like 5 years or more, an annuity growing tax deferred will outpace a CD, even if you pay the taxes and withdraw all the money at the end of the term. Be sure to get all the benefits of Annuity Straight Talk.  Get our free report on Guaranteed Lifetime Withdrawal Benefits for starters by filling your name and email below.  If you like what you see, read more to unlock all the resources of this site.

Finally, if you intend to invest for the long term then convert the principal and interest into an income stream in retirement, you may find that a Deferred Annuity is exactly the right combination of growth and security you’re looking for.

Annuity Vs CD: So how to they compare side by side?

For this example, let’s assume you have a 7 year investment horizon. You don’t know what you’ll be doing with the money after 7 years, so you don’t want to get too locked in. Banks will tell you that a CD is the best place to put money, citing safety and an FDIC Guarantee. But let’s dig a little deeper- there are many more factors at play here.

Don’t forget the Annuity Ground Rules – financial institutions want your money, want to keep it as long as possible, and want to pay very little for it. Retirement Investors should seek safety, but also should balance this with the highest after tax yield possible. In this scenario, because you have a longer term horizon, you should seek out a Tax Deferred Annuity yield which will significantly outpace a comparable taxable yield. CD’s are not tax deferred; you pay taxes on your gain annually. Adjusted for inflation, your money rarely grows at all and in fact you are only Losing Money Safely .

Fixed Annuities offer tax deferral, a higher interest rate than a CD, and comparable safety when placed with a stable company. Let’s put these two vehicles on paper and see which one offers you more of what you are looking for. Let’s look at your 7 year investment. We’ll assume the CD has an annual interest rate of 3.5%. This is much higher than the national average on jumbo CDs, but we’re looking at a long time line and giving the CD the benefit of the doubt. We will also assume that the taxes due annually on the CD are paid from the investment. Finally, we assume a combined State and Federal tax bracket of 35%, but of course you may be higher or lower.

Seven year CD/Savings account
Average Annual Yield 3.50%
Tax Rate 35.00%
Opening Balance
Interest Earned
Taxes Paid
Ending Balance
Start Yr $100,000 $3,500 $1,225 $102,275
Yr. 2 $102,275 $3,580 $1,253 $104,602
Yr. 3 $104,602 $3,661 $1,281 $106,981
Yr. 4 $106,981 $3,744 $1,311 $109,415
Yr. 5 $109,415 $3,830 $1,340 $111,904
Yr. 6 $111,904 $3,917 $1,371 $114,450
Yr. 7 $114,450 $4,006 $1,402 $117,054
Totals $26,237 $9,183
Average After Tax Return 2.28%
After Tax Internal Rate of Return 2.43%

A reasonable amount of interest is earned in the CD over the seven-year period. As you can see, much of that return is wiped out due to the annual taxation of the investment. How does the Annuity compare?

Fixed Annuity with 7 year Surrender Schedule
Est. Yield to Surrender 5.60%
Tax Rate 35.00%
Opening Balance
Interest Earned
Taxes Paid
Ending Balance
Start Yr $100,000 $5,600 Deferred $105,600
Yr. 2 $105,600 $5,914 Deferred $111,514
Yr. 3 $111,514 $6,245 Deferred $117,758
Yr. 4 $117,758 $6,594 Deferred $124,353
Yr. 5 $124,353 $6,964 Deferred $131,317
Yr. 6 $131,317 $7,354 Deferred $138,670
Yr. 7 $138,670 $7,766 $16,253 $130,183
Totals $46,436 $16,253
Average After Tax Return 3.93%
After Tax Internal Rate of Return 3.84%

This table shows a substantially greater amount of interest due to the tax deferral available in annuity contracts. You did in fact pay more in taxes, but you had even more money available to pay those taxes. Illustrated side by side, the benefits of the annuity are obvious.

Pre-Tax Gain
Ending Account Value
Cumulative Tax
Net gain
Average After Tax Return
Internal Rate of Return

It’s important to note a couple other key features when comparing an Annuity VS CD:

With an Annuity, you don’t pay your taxes until you withdraw the money
Often an investor’s tax bracket in retirement will be lower than during their earning years, further increasing the after tax account value and yield
If you convert your account value into an income stream at the end of your tax deferral period (annuitization) you can continue to defer your taxes out into the future.

For an investor with a medium to long term time horizon and the goal of growing their assets and then converting those assets into a stream of income, the Annuity is the clear winner over CD’s and Treasuries. For short term investors, or those seeking maximum liquidity, the CD has its place. However, most good annuities offer annual free withdrawals of 10% of your paid in principal, mitigating liquidity constraints.

When a CD yield and an Annuity Yield are the same, your decision needs to be based on your liquidity needs: the tax deferred growth of an Annuity will outpace the currently-taxed CD, but comes at the trade-off of some liquidity.

When you compare annuities in The Annuity Report , and you look at an annuity with a low guaranteed rated and low current and yield to surrender rate, you know that the liquidity restriction of this product isn’t a good deal. It’s products like these that tempt investors with front-end bonuses, and teaser rates and low guarantees in later years, with long surrender charges, that give annuities a bad name.

Our Suitability Quiz will help you determine if an annuity is a good fit for you. And please, Contact Us if you would like to speak to an Annuity Expert. More about Annuity vs CD.

Written By

Bryan Anderson

Bryan Anderson is a licensed insurance producer and a career finance specialist. With Mr Pulsifer, he started Annuity Straight Talk to bring his unique views on guaranteed retirement income and planning to a wide audience. He enjoys working with investors around the US from his offices in NW Montana.

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