A certificate of deposit is a bank deposit. A fixed indexed annuity is a contract with an insurance company. They both can be described, loosely, as places to park money you do not want in the stock market. The legal wrapper is different, the early-exit penalty is different, and the tax timing is often different. Neither is “safe growth.” A CD can lose purchasing power to inflation. An indexed annuity can return less than you paid if you surrender early, and its guarantees depend on the insurer.

What stands behind the promise

The FDIC says deposit insurance covers deposits, including certificates of deposit, up to $250,000 per depositor, per FDIC-insured bank, per ownership category. The FDIC’s “Understanding Deposit Insurance” page carrying that standard amount was last updated April 1, 2024. Coverage can be higher when money is in different ownership categories or at different banks. It is not higher because a CD is large. Amounts over the limit at a single bank in one category are not fully insured.

A fixed indexed annuity is not a deposit. FINRA states that annuities are not FDIC insured and not SIPC insured. If the insurer becomes insolvent, a state guaranty association may cover annuity benefits up to a statutory limit. NOLHGA says most associations provide at least $250,000 in present value of annuity benefits, and that limits vary. New York’s department describes coverage up to $500,000 for a New York resident’s fixed benefits. That $500,000 figure is New York’s, not the national figure. Guaranty coverage is not a reason to buy, and it is not a reason to ignore the insurer’s financial condition. It pays, within limits, after a failure. It does not make the contract a bank account.

The interest you are shown

A CD states a rate and a maturity. If you hold it to maturity and the bank is FDIC-insured within the limits above, you receive the deposit and the agreed interest, subject to the bank’s compounding terms. You do not receive more because a stock index rose.

An indexed annuity’s credit depends on the index formula. In a strong year it can be higher than a CD rate and still lower than the index, because of a cap, a participation rate, a spread, or excluded dividends. The only numbers this site will use for that idea are the SEC’s and FINRA’s hypotheticals, collected on the cap page. In a down index year, the annuity typically credits zero if you do not withdraw, which can be less than a CD that is still paying its stated rate. Over several years the comparison depends on renewal caps and on the CD rates available at each renewal. There is no honest one-line answer to “which pays more.”

Getting out early

A CD often charges an early-withdrawal penalty of a stated amount of interest if you break it before maturity. The penalty is the bank’s term. Ask for it. It is usually shorter in calendar time than an annuity surrender schedule, because CD maturities people actually buy are often months to a few years, but that is a description of common banking practice, not a survey, and a long-term CD can have its own penalty.

An indexed annuity’s surrender period is, in the SEC’s words, often six to ten years or longer. The charge usually declines yearly, according to the NAIC guide. You can receive less than the premium. Some contracts waive the charge on a small withdrawal, for example 10 percent or less — the NAIC’s example, not a survey. A CD and an annuity with the same “I might need this” problem are not equally liquid just because both advertise a rate.

Taxes

Interest on a CD held outside a retirement account is generally taxable as it is credited or paid. Earnings inside a nonqualified annuity are generally tax-deferred until you take them out, and then they are ordinary income. Deferral can be an advantage. It can also be paired with an additional 10 percent tax if you are under 59½ and no exception applies. A CD does not carry that additional annuity tax. An IRA can hold either a CD or an annuity; inside a traditional IRA, both are already in a tax-deferred account, so the annuity’s deferral is usually not an extra benefit. FINRA makes that point about annuities in plans. Required distributions from a traditional IRA generally begin at 73, CD or annuity.

Choose a CD when you want a stated rate, a stated maturity, and FDIC coverage within the limits. Choose to learn more about an indexed annuity when you want the index formula and you can leave the money through the surrender period. Do not choose either because someone described it as risk-free. Read risks and taxes before you treat the comparison as finished.

Sources

Not advice. IndexedAnnuity.com is not an insurance company, agency, broker-dealer, or tax advisor. Nothing here is a recommendation to buy, hold, or replace a contract. Guarantees exist only in a specific contract and depend on the insurer’s ability to pay. Products and state laws differ. Read the contract.
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