Whether a deferred fixed annuity or a CD is better for your savings plan depends on a number of individual factors. You can compare annuities and bank CDs regarding the safety of your principal, the length of term you are looking for, your distribution options, and tax benefits. Both products are lower-risk than many other options, yet differ from one another significantly. Your financial priorities and goals will help determine if a deferred fixed annuity or CD is best for you.
Certificates of deposit (CDs) are usually issued by banks and guaranteed by FDIC insurance for $250,000. Even if the bank issuing the CD failed, your investment should be protected by the federal government. Equity linked CDs are somewhat like a combination of both products because they have the protection of a CD along with the possibility to gain in a stock market index. Deferred fixed annuities are backed by the strength of the insurance company that issues them so you want to fully research the financial strength of your insurer.
Deferred fixed annuities are meant for long term investing, while CDs are best used for shorter term goals like saving for a car or down payment for a home. CDs have a maturity date where you must reevaluate your investment by either turning it to another CD, a deferred fixed annuity, or cashing it in. With a deferred fixed annuity your distribution options are maintaining an income stream that lasts over your lifetime or leaves your heirs death benefits, cashing it in, or leaving the funds to accumulate until you need them. CDs are taxed when the interest is earned, even if you haven’t used the money yet, while deferred fixed annuities are not taxed until you actually use the money those earnings were attached to. Whichever options work best for you will determine which product you should invest in.
