Daniel Stewart

Understanding the Difference Between Annuity and CD

Are you looking for ways to grow your wealth? There are many options available to you. But two of the most common methods to save for the future are certificates of deposits (CDs) and annuities. These two investment options are low-risk and low-return compared to alternatives, but they're fantastic tools for keeping your money safe while earning growth to meet your goals.

While they're similar, there are several notable differences to consider.

What is a CD?

A CD is a short- to medium-term investment vehicle. When comparing annuity vs CD, CDs offer more flexibility. CDs are time deposit accounts. That means you deposit funds into the account and leave it there to mature. Banks and credit unions provide various terms.

The important thing to remember is that you lock in the interest rate provided at the time. That interest rate will apply throughout the accumulation phase, compounding to grow the initial deposit. Once it matures, you can take the initial deposit and any interest you earn, subject to taxes like regular income.

CDs typically have lower interest rates than annuities. But they offer more flexibility. You can choose terms, shop around for rates and decide how much you want to deposit.

If you withdraw your money before maturation, there are penalties. However, those penalties tend to be lower than those with annuities.

What's an Annuity?

If you're trying to choose between an annuity vs CD for retirement planning, annuities are the way to go. Annuities are a popular instrument for those looking to make long-term investments for retirement. They generally pay higher interest, but they also come with steeper penalties for early withdrawal.

There are many types of annuities available, but they all work similarly. You're forming a contract between you and an insurance company when you get an annuity. In exchange for your premium, you're getting guaranteed income later.

You can make large single-payment premiums or provide ongoing payments during accumulation. Later, you'll enter the annuitization phase when the annuity converts to a series of guaranteed payments. It's a great tool for retirement, and many individuals invest in annuities to supplement other sources of retirement income.

Author Resource:-

Daniel Stewart has been helping people with their money management and personal finance with over 15 years' experience in business finance. You can find his thoughts at annuity investments blog.