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TAXES | Taxes on interest gains are deferred until money is withdrawn | Interest gains are taxable annually as they are earned |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 |