For most people, the answer to this question is it depends. While some features are similar, fixed annuities and bank certificates of deposit (CDs) also have characteristics that differ. What works for you may depend on which features best fit your financial situation and investment objectives.

Are you looking for safety?

Both CDs and fixed deferred annuities are generally considered "low-risk" investments compared to other investment options. CDs are sold by banks; fixed annuities are issued by insurance companies. In most instances, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. Fixed annuities are not insured by the federal government, but are backed by the financial strength of the insurance company that issues the annuity. Of course, annuity guarantees are subject to the claims-paying ability of the issuing company, so when considering a fixed annuity, make sure the issuing company is financially sound. You can get an idea of the financial strength of a company by referring to an independent rating company such as Moody's, A.M. Best, or Standard & Poor's, which evaluate the financial strength of insurance companies and publish ratings based on their assessments.

How long is your investment horizon?

CDs are often used for short-term accumulation. CDs are issued in a variety of maturity periods, from as short as one month to three years or longer. On the other hand, fixed annuities are better suited for long-term accumulation. Most fixed annuities have maturity periods of five years or longer, although some fixed annuities have maturity periods as short as two years.

In any case, most CDs and fixed annuities assess a penalty for taking money out of your account prior to the maturity date. Some CDs allow you to withdraw interest as it's earned. However, if you want to withdraw principal, you'll likely be assessed an early withdrawal penalty. Likewise, many fixed annuities allow you to receive earned interest, and some annuities even allow a limited penalty-free withdrawal of up to 10% of the account value annually. But annuity withdrawals exceeding any penalty-free amount will also be subject to a withdrawal or surrender charge.

What type of return do you want?

Both CDs and fixed annuities credit interest to your account. The rate of interest is often based, at least in part, on the maturity period of the vehicle: the longer the investment period, the higher the interest rate likely to be offered. CDs generally pay a fixed interest rate for the entire term. The interest rate paid by a fixed annuity may change annually, subject to a minimum interest rate that lasts for the entire term. There are some fixed annuities that pay a fixed rate of interest for a fixed period of time, usually to maturity. While the interest rates of CDs and fixed annuities with similar maturity periods are often similar, since most fixed annuities have longer maturity periods than CDs, the interest rate offered may be a little higher than a CD with a shorter maturity term. It's also worth noting that fixed annuity companies guarantee a minimum interest rate for the term of the annuity, and sometimes, may guarantee a higher interest rate for a certain period of time.

Are taxes an issue?

If income taxes are a concern, be aware that the interest you earn on your CD (presuming it's not held within an IRA) is taxable in the year it's earned, even if you don't take the money. Conversely, the interest earned in a fixed annuity is not subject to income tax until you actually take the money out. With a fixed annuity, you have a little more control over when you'll pay taxes on your interest earnings. Also, interest earnings from CDs must be included as income when calculating whether a portion of your Social Security benefits will be subject to income tax. However, interest earned within a fixed deferred annuity (so long as it's not withdrawn) is not included in this calculation.

Withdrawing money at maturity

When your CD matures, you're able to take the principal and any interest earnings out in a lump sum, or you can usually renew the CD for the same or a different term, and often at a different interest rate. You can do the same thing with money from a deferred annuity. You'll be taxed on the interest earnings at that time, and, if you're not at least age 59½, you may also face a 10% tax penalty on earnings as well, unless an exception applies. However, a deferred annuity provides you with the option to convert your account to a stream of payments that can last for your entire life. Known as annuitization, this gives you the option to receive periodic payments (e.g., monthly, quarterly, or annually) from your annuity for a fixed period of time, such as ten years, or for the rest of your life.

While some features are similar, fixed annuities and bank certificates of deposit (CDs) also have characteristics that differ. Fixed annuities are not FDIC insured, are not issued by a bank or government agency, and are not a deposit.