Fixed annuities and bank certificates of deposit (CDs) get compared often because both offer a set rate of return over a defined period. But the similarities mostly stop there, and the two products differ in some important ways.

Who backs the guarantee

CDs are backed by FDIC insurance up to applicable limits, a federal government program. Fixed annuities are backed by the issuing insurance company’s claims-paying ability, and in most states, an additional layer of protection through a state guaranty association, which is different from FDIC insurance and has its own limits and rules.

Taxes

CD interest is generally taxable in the year it’s earned, even if you don’t withdraw it. A non-qualified fixed annuity, by contrast, grows tax-deferred, so you don’t owe taxes on the growth until you take a withdrawal. That can matter a lot over a multi-year holding period.

Liquidity

CDs typically charge an early withdrawal penalty (often a few months of interest) if you cash out before maturity. Annuities usually have a longer surrender charge period (commonly several years) with charges that can be meaningfully higher than a typical CD penalty, though most also allow penalty-free withdrawals up to a certain percentage each year.

Income options

A CD simply matures and returns your principal plus interest. An annuity can be converted into a guaranteed lifetime income stream, something a CD cannot do on its own.

Neither product is universally better; CDs tend to suit shorter time horizons and full liquidity needs, while fixed annuities tend to suit longer time horizons, tax deferral, and the option of future lifetime income.

This article is educational and general in nature. It isn’t personalized financial or tax advice. Annuities are not FDIC insured.