Fixed Annuities vs. CDs: What’s the Difference?

What Is a Fixed Annuity?

A fixed annuity is an investment typically sold by an insurance company that provides cash payments at a guaranteed rate of interest. You can purchase an annuity with a lump sum payment or by making payments over time.

Annuities may invest in stocks, bonds, mutual funds or other investments. There are two ways to receive income from annuities:

• Immediate income annuities usually begin disbursing payments within one to 13 months
• Deferred income annuities pay out at a future date. You may receive payments as a lump sum or in regular installments.

Annuities can be a useful way to diversify your portfolio and generate a steady income stream in retirement. They're a low-risk investment; in addition to guaranteed interest, your principal is typically guaranteed by the insurance company selling the annuity. Some annuities also pay out a death benefit to your beneficiaries.

Learn more: Types of Annuities to Know

What Is a CD?

A CD is a deposit account that typically earns interest at a fixed rate for a set time period (the CD's term), which generally ranges from one month to five years. When the CD matures at the end of the term, you receive your deposit back plus interest.

CDs usually earn interest at higher rates than traditional savings accounts, but in exchange for the higher returns, you give up access to your money until the CD matures. Taking money out of a CD before maturity generally triggers an early withdrawal penalty, usually a certain number of days' worth of interest.

Most CDs require a minimum opening deposit, which can range from $500 to $2,500 and up. CDs purchased from banks insured by the Federal Deposit Insurance Corp. (FDIC) or credit unions insured by the National Credit Union Administration (NCUA) are guaranteed for up to $250,000 even if the financial institution fails, making them a very safe place to save your money.

Learn more: Are CDs Worth It?

Fixed Annuities vs. CDs

Both fixed annuities and CDs offer a lower-risk way to generate predictable returns, but there are important differences between the two.

Interest rates on fixed annuities are guaranteed not to drop below a minimum amount. The guarantee is only for a certain time period, which may range from one to 10 years; after that, interest rates may adjust. Meanwhile, the interest rate on a CD is typically locked in until maturity. National average annual percentage yields (APYs) for a $10,000 CD range from 1.51% for a three-month CD to 2.47% for a one-year CD, according to May 2025 Curinos data. You can even find high-yield CDs with APYs of 4% or more.

When it comes to paying taxes, annuities grow tax-deferred; you won't pay taxes on your earnings until you start receiving payments. With CDs, you'll receive an annual 1099-INT statement of your CD's interest earnings.

If you're looking for the safest investment, CDs are FDIC- or NCUA-insured up to $250,000 per institution, account holder and ownership category. Meanwhile, annuities are less secure. While the principal you invest in a fixed annuity is typically guaranteed by the insurance company selling it, if the insurance company fails, there's no FDIC or Securities Investor Protection Corporation (SIPC) guarantee. States generally guarantee your funds if an insurer goes out of business—typically up to $250,000 per investor, per company. However, that might not be enough to recoup your investment.

Learn more: How to Earn Extra Money on Your Savings

Should You Get a Fixed Annuity or a CD?

Fixed annuities and CDs can serve different purposes, so it's important to assess your financial goals when deciding if either makes sense for you.

When to Consider Getting a Fixed Annuity

A fixed annuity may be right for you if:

• You want your savings to grow tax-deferred. Many people enter a lower tax bracket after retirement. Deferring annuity disbursements until you retire can help you make the most of your money.
• You need steady income in retirement. A fixed annuity can provide predictable payouts to supplement your pension, Social Security benefits or other investments during retirement.
• You want to diversify your portfolio. Fixed annuities provide a low-risk investment option, helping to balance out riskier investments such as stocks to protect your portfolio from market fluctuations.
• You've maxed out your other retirement savings vehicles. If you've reached your annual contribution limits to your IRA and 401(k) and still want to save more for retirement, you can buy an annuity outside your retirement accounts.

If you're interested in purchasing annuities, a financial planner can explain your options and help you choose the best annuity for your needs. Check the financial stability of the insurer selling the annuity by consulting ratings from AM Best or Moody's.

Learn more: The Best Low-Risk Investments

When to Consider Getting a CD

A CD could make financial sense if:

• You're saving for a short- to medium-term goal. A CD can be a good way to save for near-term financial goals such as buying a car or making a down payment on a house.
• You can afford to lock up funds temporarily. CDs aren't a substitute for an emergency fund, since tapping them early means paying a penalty. If you have money you don't need for a while, a CD can be a smart place to put it.
• You prioritize safety and want your funds insured. Choosing a CD from an FDIC- or NCUA-insured bank or credit union guarantees your money is safe up to $250,000.
• You prefer a simple savings option. Fixed annuities are complex; choosing the right one can be confusing. CDs are easy to understand and offer guaranteed returns.
• You want to diversify your investments. CDs can be a low-risk part of your portfolio. Many people put required minimum distributions from retirement accounts into CDs to earn interest, for example.

Learn more: Should You Use CDs for Retirement Planning?

Smart Ways to Save

Looking for more ways to make your money work for you? Other low-risk savings and investment choices include high-yield savings accounts, money market accounts and bonds. Like CDs and fixed annuities, these options can help cushion your money against interest rate fluctuations or stock market downturns.

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