Annuity vs. CD: Which Is Better for Retirees?

Choosing between a Multi-Year Guaranteed Annuity (MYGA) and a Certificate of Deposit (CD) depends on your personal financial goals, particularly your timeline and tax situation. A CD is a straightforward savings vehicle offered by banks with federal deposit insurance, while a MYGA is an insurance product that offers tax-deferred growth and is protected by state guaranty associations.

Both are designed to provide stable, predictable returns, making them popular choices for retirees looking to protect their principal. However, they are not interchangeable. This guide breaks down the essential differences to help you make an informed decision for your retirement savings strategy.

When you place a MYGA and a CD side-by-side, their core distinctions become clear. The table below offers a snapshot of their main features.

The most critical difference between a CD and a MYGA is how your money is protected. CDs purchased from a member bank are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government. This coverage protects your deposit up to $250,000 per depositor, for each account ownership category, in the event of a bank failure.

MYGAs, as insurance products, are not covered by the FDIC. Instead, they are backed by the financial strength and claims-paying ability of the issuing insurance company. As a second layer of protection, state guaranty associations provide coverage to policyholders if an insurer becomes insolvent. However, coverage limits and terms vary significantly by state, and you should verify the protection available where you live.

The tax treatment of earnings is another major differentiator. With a CD, the interest you earn is considered taxable income in the year it is earned, regardless of whether you withdraw it or not. Your bank will send you a Form 1099-INT each year to report this income to the IRS.

A MYGA offers a significant advantage known as tax deferral. The interest your annuity earns is not taxed until you make a withdrawal. This allows your money to compound faster over time, as you are earning interest on your principal, the interest already earned, and the money you would have otherwise paid in taxes. When you do take withdrawals, the gains are taxed as ordinary income. It is always wise to consult a tax professional to understand the implications for your specific situation.

Both products are designed for a set time horizon and have penalties for early access. A CD imposes an early withdrawal penalty, which is typically a loss of a certain number of months of interest. For example, you might forfeit three months of interest for withdrawing from a 1-year CD before it matures.

A MYGA has what is known as a surrender charge period, which is the term of the annuity (e.g., 3, 5, or 7 years). If you withdraw more than the allowed penalty-free amount (often up to 10% of the account value per year), the insurance company will assess a surrender charge. These charges typically decline over the surrender period. Additionally, for non-qualified annuities, any withdrawal of gains before age 59.5 may be subject to a 10% federal tax penalty.

Want personalized guidance on which option aligns with your retirement goals? Get Matched with a licensed annuity advisor who can provide a one-on-one consultation.

Linda is 67, a retired teacher with a healthy nest egg. She wants to set aside $200,000 in a safe vehicle for five years to fund a future travel goal. She doesn't need the income right now and wants to maximize growth without market risk.

If Linda chooses a 5-year CD, her interest earnings will be taxed each year, slightly reducing her effective return due to the annual tax drag. If she chooses a 5-year MYGA, her interest will compound on a tax-deferred basis. Assuming a hypothetical 5.50% rate for the MYGA and a 4.75% rate for the CD, the tax-deferred growth in the MYGA could lead to a higher net return after five years, even after paying taxes on the withdrawal. This makes the MYGA a potentially better fit for her specific goal of maximizing growth over a set period without needing immediate access.

This example is for illustrative purposes only and does not represent a guarantee of future results.