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Comparing indexed annuities and indexed CDs

As you approach retirement, you likely want to make sure that your hard-earned savings remain just exactly that – safe! One way to do that is by putting at least a portion of your money in fixed investments like CDs or bonds. But given the minuscule interest rates today, you might be better off just stuffing your money under a mattress. This is where indexed annuities and indexed CDs could be a viable alternative.

How Indexed Financial Products Work

In today’s uncertain market, many investors and retirees are considering indexed products over regular fixed investments. One reason for this is because there is the opportunity to generate higher returns than regular fixed financial vehicles but without the risk of loss.

For example, the return on a fixed indexed annuity is determined in large part by the performance of one or more indexes that are tracked. Some of the more common indexes are the S&P 500 and the Dow Jones Industrial Average (DJIA).

In this case, if the underlying index(es) perform well during the contract year, the annuity will be credited with a positive return – oftentimes up to a pre-set maximum, or “cap.” However, if the index(es) incurs a loss, the contract value of the annuity will not go down. Rather, it is credited with a guaranteed “floor” rate, which is often in the neighborhood of 0% to 2%.

Like other types of annuities, a fixed indexed annuity allows for tax-deferred growth. This means that there are no taxes due on the gain until the time of withdrawal. This, in turn, can keep your account value intact, with no need to “make up” for previous losses in order to continue compounding.

It is important to note, though, that most annuities – including indexed products – have surrender charges. Therefore, if you cancel the annuity or withdraw more than a maximum amount from the contract during the surrender period, you can be charged a withdrawal fee. This is in addition to any taxes that you may owe.

Indexed CDs (or indexed certificates of deposit) also have their return based on the performance of one or more particular market indexes. So, unlike regular CDs, an indexed certificate of deposit isn’t locked into a set interest rate that remains the same throughout the entire holding period.

Similar to a fixed indexed annuity, the upside of an indexed CD is oftentimes capped at a certain maximum, and the value is protected from a downward moving market. There are some issuers of indexed CDs that may offer you a guaranteed “base” return.

Another nice feature of indexed CDs is that, because they are bank products, they are covered by FDIC insurance, up to the legal limit of $250,000 (in 2020). So, even if the bank you purchased the CD through goes under, you won’t lose all of your money.

Like many other financial products – including CDs – you will typically incur a penalty if you cash in an indexed CD before it has matured. If that happens, it could have an impact on the amount of your overall return.

Comparing Indexed Annuities and Indexed CDs

Although there are several similarities between fixed indexed annuities and indexed CDs, there are also some differences. With that in mind, it is important to compare the two so that you’ll know what to anticipate if you purchase one or both of these financial vehicles.

Fixed Indexed Annuities versus Indexed CDs

 Fixed Indexed AnnuityIndexed Certificate of Deposit (CD)
Growth OpportunityYesYes
Downside ProtectionYesYes
Tax-Deferred GrowthYesNo
FDIC InsuredNoYes
Early Withdrawal PenaltyYesYes

Are Indexed Financial Vehicles Right for Your Portfolio?

Even though indexed annuities and indexed CDs offer some enticing benefits, they are not right for all investors or retirees. Therefore, before you make a commitment to purchasing either (or both) of these investments, be sure that you discuss your objectives and your possible options with a financial professional who is well-versed in both.

At Annuity Gator, we specialize in educating consumers and financial advisors about how all types of annuities work. We also compare different annuities so you can see which one – if any – would fit well in your portfolio.

So, if you have any additional questions regarding indexed annuities and/or retirement income strategies, feel free to contact us by calling (888) 440-2468, or you can send us an email through our secure online contact form. We look forward to assisting you.

Comparing Indexed Annuities and Indexed CDs

  • Tinna McGee
    10:17 PM, 1 May 2021

    I would like to see an example of which actually gains more over 5, 10, 20, 50 years, using an initial investment of $10,000.00. After reading this article I am no more knowledgable about which will have the largest return on investment than I was before.

    • Annuity Gator
      10:05 AM, 3 May 2021

      Hi Tinna – Thank you for your message.
      We would be happy to educate you on annuities. We can provide you personalized information and help you find out if an annuity is even right for you. In order to best support you, we would need some additional information from you. Rather than sending the info back and forth via email, it would be best to discuss it by phone. Please feel free to contact us directly, toll-free, at (888) 440-2468 to chat with one of our annuity specialists or visit
      We look forward to hearing from you.
      Annuity Gator

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