The great debate: CDs vs. Annuities


When looking for safe investment options, many investors look to CDs, especially when equity investments are on the downturn. Many seem to think CDs are the only option that can provide safety and guaranteed growth. However, tax-deferred annuities compare very favorably to CDs, and investors should review both products’ features to help determine which is best suited for their financial situation:

  • Tax Savings – Annuity gains grow tax-deferred, while interest earned on CDs is taxed and reported annually as ordinary income. Taking advantage of tax deferral will increase your earning power by continued annual earnings on your tax savings.

    Earnings on annuities are taxed as ordinary income when withdrawals are made. However, you do have an option to spread out the tax burden for non-qualified money through guaranteed income payments, where payments are partly return of non-taxed cost basis.

  • Earning Power – As of October 2014, the average return on a one-year CD was 0.26 percent, and the average for a five-year CD was 0.83 percent. 1 At the same time, the average five-year fixed annuity rate was 1.63 percent2 – a tax equivalent yield of 2.26 percent, based on a 28 percent tax bracket.  

    Investors could also take advantage of tax-deferred indexed annuities to provide even more earning potential. These products include many indexing options, including un-capped strategies, with no downside risk to principal.

  • Lifetime Income Options – Tax-deferred annuities offer guaranteed lifetime income payments through annuitization or lifetime income riders. These are great retirement planning tools that generate income that you can’t outlive. CDs can be liquidated as they mature, but there’s no guarantee the funds will last a lifetime.

  • Liquidity – Annuities allow up to 10 percent of the value to be withdrawn without penalty. With CDs, withdrawals prior to maturity are generally subject to penalties.

  • Payment at Death – Annuities can help avoid probate by paying funds directly to the beneficiary. CDs, however, are subject to probate, along with possible costs and delays.

The Bottom Line: CDs aren’t the only safe investment option available. Make sure your clients see how the features of an annuity compare and can potentially offer them more benefits. 



CDs Annuities