Fixed Annuity vs. CD: Which Pays More in 2026?

If you have money to set aside for the future and want a guaranteed return, two products likely come to mind: certificates of deposit and fixed annuities. Both promise a set interest rate for a set period of time, and both protect your principal. But the similarities mostly end there. In 2026, the gap between what each product pays has widened significantly, making the choice more consequential than it has been in years.

This guide breaks down how each product works, compares current rates, explains the tax differences, covers safety and liquidity, and helps you figure out which option (or combination of both) makes the most sense for your situation.

How Fixed Annuities and CDs Work

A certificate of deposit is a time-bound deposit you make at a bank or credit union. You agree to leave your money in the account for a specific term, anywhere from a few months to 10 years, and the bank pays you a fixed interest rate in return. When the term ends, you get your principal back plus the interest earned. CDs are one of the simplest financial products available and are widely offered by virtually every bank in the country.

A fixed annuity, specifically a multi-year guaranteed annuity (MYGA), works in a similar way but is issued by an insurance company instead of a bank. You hand over a lump sum, and the insurer guarantees a fixed interest rate for a term you choose, typically 3 to 10 years. At the end of the term, you can take the money, roll it into another annuity, or convert it to a stream of income payments. The interest compounds inside the contract without any annual tax bill, which is one of the biggest differences from a CD.

Both products are considered conservative, low-risk options. Neither is tied to the stock market, and both guarantee your principal as long as you hold them to maturity. The differences show up in how each is taxed, how each is protected, and what happens when you need your money before the term is up.

Current Rates: Annuities vs. CDs in 2026

In early 2026, the rate environment strongly favors fixed annuities. The best 10-year MYGA rates have climbed to approximately 7.65%, while the best 10-year CD rates sit around 4.00%. That is a spread of roughly 2.30 percentage points, which represents a meaningful difference in earnings over a decade.

At shorter terms, the gap narrows but remains significant. Five-year MYGA rates reach around 6.30%, compared to roughly 4.00% for the best five-year CDs. Even three-year MYGAs, which currently yield around 5.50% to 6.00%, outpace most three-year CDs by a wide margin.

Why do annuities pay more? Insurance companies invest premiums into long-term bonds and other fixed-income assets, and they can offer higher rates because your money is locked up longer and is less liquid. Banks, on the other hand, must hold reserves and comply with stricter liquidity regulations, which limits how much they can pay depositors. The rate difference is not a sign that annuities are riskier. Rather, it reflects the different business models and regulatory environments of banks and insurance companies.

To put the numbers in context, a $100,000 deposit at 7.65% over 10 years grows to approximately $209,000 (assuming annual compounding), while the same amount at 4.00% grows to roughly $148,000. The annuity earns about $61,000 more before taxes. Of course, taxes will eventually apply to the annuity gains, but the deferral still provides a significant advantage in total accumulation.

Tax Differences: Tax-Deferred vs. Taxed Annually

The tax treatment of CDs is straightforward. Interest earned on a CD is reported as ordinary income in the year it is credited to your account, even if you do not withdraw it. Your bank sends you a 1099-INT each year, and you pay taxes at your marginal income tax rate. If you are in the 22% federal tax bracket and earn $4,000 in CD interest, you owe $880 in federal tax on that interest alone, plus any applicable state tax.

Fixed annuity interest, by contrast, grows tax-deferred. You do not owe any tax until you actually withdraw money from the contract. This means your full balance compounds year after year without being reduced by annual tax payments. Over a long period, this deferral can significantly increase your total returns compared to a taxable CD.

When you do withdraw from an annuity, the gains are taxed as ordinary income using a last-in, first-out (LIFO) method, meaning interest comes out first. If you are under age 59 and a half, the IRS also charges a 10% early withdrawal penalty on the taxable portion. For retirees who are already past that age threshold, the penalty does not apply, but regular income tax still does.

One important note: if you hold a CD inside a tax-advantaged account like a traditional IRA, the interest is also tax-deferred, which eliminates the tax advantage of the annuity. In that case, the comparison comes down purely to the rate difference, liquidity, and safety features. Consult a tax professional to understand how each option affects your overall tax picture.

Safety: FDIC Insurance vs. State Guaranty Funds

CDs benefit from FDIC insurance, which covers deposits up to $250,000 per depositor, per insured bank. This is a well-known, federally backed guarantee. If your bank fails, the FDIC steps in and you get your money back, typically within days. For joint accounts, coverage extends to $500,000 ($250,000 per co-owner). The FDIC has never failed to honor this guarantee since it was established in 1933.

Fixed annuities are not FDIC insured. Instead, they are backed by the financial strength of the issuing insurance company and, as a secondary safety net, by your state's guaranty association. Every state has a guaranty fund that provides coverage if an insurer becomes insolvent. Limits vary by state, ranging from $100,000 to $500,000 in annuity benefits. Most states set the limit at $250,000, which matches the standard FDIC threshold.

It is also worth noting that insurance company insolvencies are rare. State insurance regulators closely monitor insurers' reserves and financial health. When choosing an annuity, look for carriers with high ratings from agencies like A.M. Best, S&P, or Moody's. A rating of A or better is generally considered strong. By selecting a well-rated insurer and staying within your state's guaranty limits, you can achieve a level of safety that is comparable to FDIC-insured CDs.

Liquidity: Getting Your Money Out Early

Liquidity is the area where CDs have a clear edge. If you need to break a CD early, the penalty is usually modest, often ranging from 90 days to 12 months of interest depending on the term length. You will never lose your principal by breaking a CD early. Some banks also offer no-penalty CDs, which allow early withdrawal without any charge (though these typically come with lower rates).

Fixed annuities are less liquid. Most MYGAs impose surrender charges during the contract term, typically starting at 7% to 10% of the withdrawal amount in the first year and declining by about one percentage point per year. A 10-year annuity might carry surrender charges for the full 10 years. However, most annuities include a free-withdrawal provision that allows you to take out up to 10% of the account value each year without a surrender charge.

Beyond surrender charges, annuity withdrawals before age 59 and a half trigger the IRS 10% early withdrawal penalty on any taxable gains. CDs do not have this age-based penalty. This makes annuities particularly ill-suited for money you might need before retirement. If you are under 59 and a half and value flexibility, a CD is almost certainly the better choice for funds you may need to access.

When a Fixed Annuity Wins

A fixed annuity is typically the better choice if you are saving for retirement, are over 59 and a half (or will be by the time you need the money), and can commit your funds for at least 3 to 10 years. The higher rate and tax-deferred growth create a compounding advantage that grows more powerful over longer time horizons.

Fixed annuities also make sense if you are in a high tax bracket during your working years but expect to be in a lower bracket in retirement. By deferring taxes until you withdraw, you may pay a lower rate on the gains. This is the same logic behind contributing to a traditional IRA or 401(k).

Another scenario where annuities win: if you have already maxed out your IRA and 401(k) contributions and want additional tax-deferred growth. There is no annual contribution limit for non-qualified annuities, so you can deposit as much as you like in a single purchase. This makes annuities an attractive option for high earners looking for extra tax-advantaged savings.

When a CD Wins

A CD is the better choice when you need guaranteed access to your money within a few years, are under 59 and a half and cannot afford the IRS early withdrawal penalty, or simply prefer the simplicity and familiarity of a bank product. CDs are also better for short-term goals, such as saving for a home purchase or building an emergency reserve, because the early-withdrawal penalties are small and predictable.

CDs also win if you are already in a low tax bracket and the annual tax on CD interest is minimal. In that scenario, the tax-deferral benefit of an annuity is less meaningful, and the liquidity advantage of the CD becomes more important. If you are retired and in the 10% or 12% tax bracket, the after-tax difference between the two products may be smaller than the headline rates suggest.

Investors who want FDIC insurance with no questions asked may also prefer CDs. While state guaranty funds provide solid protection, the FDIC is a federal backstop that many people find more reassuring. There is nothing wrong with prioritizing peace of mind.

Laddering Strategy: Combining Annuities and CDs

You do not have to choose one or the other. A laddering strategy lets you benefit from both products by splitting your money across different terms and product types. The idea is to stagger maturity dates so that a portion of your savings becomes available at regular intervals, giving you periodic access to cash while still earning competitive rates on the rest.

For example, you might put one-third of your savings into a 1-year CD for near-term liquidity, one-third into a 3-year MYGA for a mid-term rate boost, and one-third into a 7-year MYGA for the highest available rate with tax-deferred growth. As each CD or annuity matures, you can reinvest based on current rates and your evolving needs.

Laddering also protects against interest rate risk. If rates rise, your shorter-term holdings mature sooner and can be reinvested at higher rates. If rates fall, your longer-term holdings continue earning the original, higher rate. This approach is especially useful in uncertain rate environments where no one knows for sure which direction rates are headed.

When building a ladder, keep your annuity holdings within your state's guaranty fund limits and your CD holdings within FDIC limits. If you have more than $250,000 to invest in CDs, spread them across multiple banks to maintain full FDIC coverage. For annuities, you can spread purchases across multiple highly rated insurance carriers.

The bottom line: fixed annuities and CDs are not competitors so much as complementary tools. In 2026, annuities offer significantly higher rates and tax-deferred growth, making them appealing for long-term retirement savings. CDs offer simplicity, FDIC insurance, and easy access, making them ideal for shorter-term needs. By understanding the strengths and trade-offs of each, you can build a savings plan that balances growth, safety, and flexibility. Consult a financial advisor to design a strategy that fits your specific financial goals and timeline.