Annuities vs. CDs: How do they compare?
Annuities and CDs both offer fixed, predictable returns, but they serve different purposes, carry different risks, and cost very different amounts. Here's how to compare them.
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Key takeaways
A CD locks in a fixed rate for a set term at a bank or credit union, with no fees and federal deposit insurance up to $250,000 per depositor, per institution.
An annuity is a contract with an insurance company that can provide a guaranteed income stream, often for life, with tax-deferred growth but higher fees and limited liquidity.
CDs are for preserving and growing cash over a defined period. Annuities are for ensuring you don't outlive your money. Many retirees use both.
How do annuities and CDs compare?
A certificate of deposit (CD) pays a fixed interest rate for a set term with no fees and features FDIC or NCUA deposit insurance protection. CDs can be used for short-term goals, medium-term goals like a down payment, or as a conservative component of a retirement portfolio. Strategies like CD laddering can help balance competitive rates with regular access to your money.
An annuity is a contract with an insurance company where you pay a lump sum (or premiums) in exchange for a guaranteed income stream, often for life. Annuities come in several forms — fixed, variable, fixed-indexed, and immediate — each with different risk profiles, fee structures, and return mechanics. Tax-deferred annuities offer tax-deferred growth, but withdrawals are taxed as ordinary income.
Here’s a quick breakdown of the differences between the two:
CD | Annuity | |
Issuer | Bank or credit union | Insurance company |
Purpose | Short- to medium-term savings | Long-term retirement income |
Returns | Fixed rate, locked in at purchase | Fixed, variable, or indexed depending on type |
Fees | None or minimal | Can be significant (surrender charges, M&E fees, administrative fees) |
Insurance | FDIC/NCUA insured up to $250,000 per depositor, per institution | Backed by the insurer; state guaranty associations may cover $100,000–$500,000 |
Liquidity | Limited (early withdrawal penalties) | Very limited (surrender charges can last five to 10+ years) |
Tax treatment | Interest taxed annually (unless in an IRA) | Tax-deferred growth; withdrawals taxed as ordinary income; 10% IRS penalty before age 59½ |
Typical term | Three months to five years | Five to 20+ years (or lifetime) |
The fee gap matters more than most people realize
CDs have essentially no fees, and the only potential cost is an early withdrawal penalty.
Annuity fees, however, are layered. They may include:
Surrender charges (5–8% in early years)
Mortality and expense fees (averages 1.25%/year)
Administrative fees
Rider fees
Investment management fees on select annuities (0.50–2.0%/year).
Total annual costs on a variable annuity can reach 2.5–3.5%. On $100,000, that’s $2,500 to $3,500 per year before you earn a return.
What does $100,000 look like in each product?
The fee gap between annuities and CDs becomes clearer when you apply it to real numbers over the same term:
A $100,000 in a 5-year CD at 4.25% APY (no fees) will yield approximately $123,135 at maturity. Funds are protected by deposit insurance against bank or credit union failure up to $250,000 per depositor, per insured institution.
Annuities are a little more complicated, and will depend on the specific products and terms you choose. Here are two examples:
$100,000 in a 5-year MYGA (multi-year guaranteed annuity) at 5.50%: approximately $130,700 at maturity. A MYGA is the closest annuity equivalent to a CD, as it locks in a guaranteed rate with no annual management fees.
$100,000 in a single premium immediate annuity (SPIA) at age 65: approximately $600 to $700 per month for life, depending on the insurer, your gender, and the payout option you choose. A SPIA converts your lump sum into guaranteed monthly income starting immediately.
Bottom line
CDs are simpler, cheaper, protected by deposit insurance, and can be better suited for short- to medium-term goals. Annuities are more complex and expensive, but they can provide guaranteed income for life — something no deposit product offers. For most savers, CDs are the more practical starting point. For retirees concerned about longevity risk, an annuity may fill a gap that CDs can't.
If you're considering an annuity, comparing the net return (after all fees) to a comparable CD term can help you determine whether the additional cost is justified. A fiduciary financial advisor can help you evaluate both options in the context of your full retirement plan.
With Raisin, you can compare CDs, high-yield savings accounts, and money market accounts across multiple federally insured banks and credit unions, all from a single login. Funds deposited through the Raisin platform are eligible for FDIC or NCUA insurance, up to $250,000 per depositor, per institution, subject to certain conditions
FAQs on annuities vs. CDs
Is an annuity better than a CD?
Neither a CD or an annuity is inherently better, as they solve different problems. A CD is better for short- to medium-term savings with guaranteed returns, FDIC insurance, and no fees. An annuity may be better for long-term retirement income planning, particularly if you want guaranteed income for life.
How much does a $100,000 annuity pay after 10 years?
It depends on the type and fees. A variable annuity at 4.50% with ~1.25% in annual fees would grow to approximately $138,000 net after 10 years. The same $100,000 in a CD at 4.25% with no fees would grow to approximately $151,620.
For income rather than accumulation, a $100,000 immediate annuity for a 65-year-old might pay roughly $600 to $700 per month for life, depending on the insurer and current rates.
Are annuities FDIC-insured?
No, annuities are not FDIC-insured. They are backed by the financial strength of the issuing insurance company. If the insurer fails, your state's guaranty association may provide limited coverage, typically capped at $100,000 to $500,000 depending on your state.
CDs, by contrast, are FDIC- or NCUA-insured up to $250,000 per depositor regardless of the bank's financial condition.
Why do some financial advisors caution against annuities?
Common concerns about annuities include:
High fees (especially on variable annuities)
Complex contract terms
Limited liquidity
Withdrawals are taxed as ordinary income
That said, well-structured annuities can serve a legitimate role in retirement planning, particularly for guaranteed lifetime income.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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