CDs vs. Annuities: An Overview

Both CDs and annuities are ways to save for the future. Most people will use an annuity to save for retirement. In contrast, CDs are best used for short- to medium-term savings goals. Some annuities can be a good option if you want to put aside some extra money for retirement. If you want a guaranteed return within five years, look for one of the best CDs paying the highest APY.

Certificates of Deposit

Risk

CD investments are protected by the same insurance that covers all deposit products. The 澳洲幸运5๊官方开奖结果体彩网:Federal Deposit Insurance Corporation (FDIC) provides insurance for bank customers, and the 澳洲幸运5官方开奖结果体彩网:National👍 Credit 🍎Union Administration (NCUA) provides insurance for credit union customers.

When you open a CD with an FDIC- or NCUA-insured institution, up to $250,000 (per account, per account category) of your funds on deposit with that institution are protected if that institution fails.

Additionally, if you pass away, your 澳洲幸运5官方开奖结果体彩网:CD's beneficiary or beneficiaries receive your CD.

Ease and Transparency

Various banks, credit unions, and online brokers offer various CDs you can shop for online. You can easily compare the 澳洲幸运5官方开奖结果体彩网:best bank CD rates using APY, and compare terms, account minimumsﷺ, and early withdrawal penalties. Banks and credit typically lay out any requirements and rest𒈔rictions regarding the CD on their websites.

澳洲幸运5官方开奖结果体彩网:Opening a CD is a fairly straightforward process that involves a simple application and transfer of funds. Closing a CD is equally straightforward.

Liquidity

CDs are not among the most liquid of investments, but they are more liquid than annuities. You must lock your funds into an account for a set period, such as one month, three months, or 澳洲幸运5官方开奖结果体彩网:five years. If you need to access these funds in an emergency, you must pay a small 澳洲幸运5官方开奖结果体彩网:early withdrawal penalty, typically a few months' interest.

Interest rates

Returns from CD interest rates are g☂enerally lower than annuity rates but higher than savings accounts. This makes them an excellent way to preserve your ca𝐆pital, especially if their rates keep up or exceed the inflation rate.

Because inflation chips away at value, it's important to ensure your CDs have a rate that will make them at least keep up with inflation—which savings account rates generally don't do.

Taxes

The interest you earn through a CD 澳洲幸运5官方开奖结果体彩网:is taxed as ordinary income and should be reported as income on your annual tax filing. However, if you open an IRA CD, you can benefit from tax-advantaged savings.

Annuities

Risk

The issuing insurance company guarantees annuities. You could lose your guarantee if the insurance company goes out of business. While state-based guaranty associations add some protection, there's a chance only part of your claim may be paid due to limitations.

Other risks shared with CDs include interest-rate risk if interest rates go up, and inflation risk, where your investment can't keep up with inflation's impact on costs. Unlike CDs, annuities may also feature a death risk — some annuities don't continue annuity payments if you die.

Ease and Transparency

Buying an annuity isn't as straightforward as opening a CD account, as an annuity is a contract with an insurance company. Like other insurance products, annuities can be complicated and come in various options more suitable for some individuals than others.

You may be unable to easily compare insurers, rates, and minimums using online marketplaces like a CD. So you must typically consult with a salesperson specializing in annui𓄧ties by phone or in person.

Annuities also feature administrative fees, mortality and risk charges, and other fees that may be hard to understand.

Liquidity

Annuities typically make periodic, ongoing payments to individuals, unlike CDs, where your investment is received as a lump sum at the end of the term.

But because annuities are generally designed to be held longer than CDs (until retirement, rather than just a few years), annuities usually have a surrender period, during which you cannot withdraw funds without paying a surrender charge or fee. There are also tax implications for ไwithdrawals from retirement annuities before age𓆏 59½.

Because of t♎his, investors who a⭕re considering purchasing an annuity should carefully consider any personal financial requirements.

Interest rates

Though annuities🙈 are less flexible than CDs, this disadvantage is offset by an advantage—annuities generally pay a higher interest rate than CDs. This is because the financial institution where you hold your annuity is exposed to𓆉 less risk because you will keep it longer.

Most CDs feature fixed interest rates. Annuities may have fixed rates, but 澳洲幸运5官方开奖结果体彩网:variable annuities feature variable interest rates.

Taxes

Annuities are designed for retirement and come with tax advantages when used iღn this way. The interest your an🌳nuity earns is tax-deferred, so you pay taxes only when you begin withdrawing from it. Withdrawals are taxed at the same tax rate as your ordinary income.

If you fund an annuity through an 澳洲幸运5官方开奖结果体彩网:individual retirement account (IRA🔯) or another tax-advantaged retirement plan, you may also be entitled to a tax deduction for your contribution. This is known as a 澳洲幸运5官方开奖结果体彩网:qualified annuity.

Special Considerations

There are 澳洲幸运5官方开奖结果体彩网:many types of annuities, but they are mainly used for 澳洲幸运5官方开奖结果体彩网:retirement purposes to help address the risk of outliving lifetime savings. An annuity's appeal is a dependable income stream over time, which makes it suitable for people looking to secure 🐼a steady income stream in retirement.

CDs come with different maturities and pay you a lump sum when they mat🌃ure. So, CDs are more suited to those looking to save money for a short-term goal. However, using a CD ladder approach, you can use CDs to design income streams. Rather than ro༒lling them into another CD, you can use the proceeds as income as they mature and payout.

Frequently Asked Questions (FAQs)

The Bottom Line

Both CDs and annuities offer a set return on ꦉyour money and are guaranteed or insured.  However, CDs can be more transparent, easy to find and open, and flexible than annuities.

CDs have shorter terms and lower penalties if you need to withdraw money in an emergency. A CD is best for short—to medium-term investments and an annuity can be better for long-term retirement investments.