What's the Difference Between a Fixed Annuity and a CD?

Fixed annuities (a.k.a. multi-year guaranteed annuities or MYGAs) operate very similarly to CDs. Both vehicles offer a safe way to save money, crediting higher interest rates than available through savings accounts by requiring you to lock your money away for a period of time. However, fixed annuities have longer-term investment horizons and tax-preferential treatment, making them a better choice for retirement savings. As CDs are the more well known of the two products, it can be easier to understand fixed annuities using a side-by-side comparison:

  FIXED ANNUITY CD
SOLD BY Insurance Companies Banks
AMOUNT YOU CAN INVEST $2,500 - $3,000,000 Virtually any denomination
INVESTMENT TERM 3 years - 10 years 3 months - 5 years
INTEREST RATES Vary by investment term & size, but typically higher than CD rates Vary by investment term & size, but typically lower than fixed annuity rates
TAXES Taxes on interest gains are deferred until money is withdrawn Interest gains are taxable annually as they are earned
ACCESS TO FUNDS Typically a portion of the account balance will be available for withdrawal annually, but a 10% IRS penalty is imposed for withdrawals before age 59½ Generally no free access to account balance is available
FINANCIAL PROTECTION Backed primarily by the issuing insurance company and additionally by State Guaranty Funds Insured by the FDIC (up to $250,000 total per bank)
LEGACY Asset passed directly to beneficiary without going through the probate process Probate process required to pass asset to heirs