When planning for retirement, many people reach a point where protecting their money becomes just as important as growing it. Two options that often come up in that conversation are Certificates of Deposit (CDs) and fixed indexed annuities.

Both can provide protection from direct stock market losses, but they work very differently. Understanding those differences can help you decide which option may fit your retirement strategy.

How Does a CD Work?

A Certificate of Deposit is a deposit account typically offered by a bank or credit union. You deposit money for a specific period of time and receive a stated interest rate in return.

CDs are generally considered conservative financial products. Bank CDs may also qualify for FDIC insurance within applicable limits, while qualifying credit-union CDs may have similar NCUA protection.

The tradeoff is that your return is normally limited to the interest rate offered when you purchase the CD. If interest rates are low, your money may grow slowly.

CDs can make sense for short-term savings goals or money you know you will need within a specific timeframe.

What Is a Fixed Indexed Annuity?

A fixed indexed annuity, or FIA, is an insurance contract designed for longer-term savings and retirement planning.

Instead of paying a traditional fixed interest rate alone, an indexed annuity can credit interest based partly on the performance of a market index, such as the S&P 500.

That does not mean your money is directly invested in the stock market.

Your credited interest is calculated according to the terms of the annuity contract, which may include a cap rate, participation rate, spread, or other crediting method.

One major attraction is downside protection. If the underlying index has a negative period, you generally do not receive a negative interest credit solely because of the index decline. However, withdrawals, surrender charges, rider fees, and other contract provisions can still reduce your account value.

CDs vs. Indexed Annuities

The better choice depends largely on what you want the money to accomplish.

A CD may be appropriate when you:

• Need relatively short-term access to your money.
• Want a predictable interest rate.
• Want FDIC or NCUA insurance within applicable limits.
• Don’t need lifetime income features.

An indexed annuity may be worth considering when you:

• Are planning for long-term retirement income.
• Want the opportunity for index-linked interest credits.
• Want protection from direct stock market downturns.
• Want tax-deferred accumulation.
• Are interested in creating an income stream you cannot outlive, subject to the contract’s terms.

One important distinction is that annuities are insurance products, not bank deposits. They are not FDIC insured. Guarantees are based on the claims-paying ability and financial strength of the issuing insurance company.

What About Taxes?

Taxes are another important consideration.

Interest earned in a traditional non-retirement CD is generally taxable in the year it is credited, even if you leave the money in the CD.

Annuities generally provide tax-deferred growth, meaning you typically don’t pay income taxes on gains until money is withdrawn. Withdrawals are subject to applicable tax rules, and distributions taken before age 59½ may also be subject to an additional federal tax penalty.

Tax deferral does not automatically make an annuity better, but it can be valuable as part of a long-term retirement strategy.

Which Is Better for Retirement?

There isn’t one answer for everyone.

CDs and indexed annuities are designed to solve different financial problems. A CD can be an excellent place for money that needs stability and relatively short-term accessibility. An indexed annuity is generally designed for longer-term retirement planning, accumulation, and income.

The important question isn’t simply, “Which one pays more?”

A better question is:

“What job do I need this money to perform?”

Once you answer that question, comparing your options becomes much easier.