Fixed Deferred Annuity vs. Savings Account

Deferred annuities and savings accounts are generally regarded as low risk investment options. Both account types provide you with regularly recurring interest payments, and neither of these investments expose you to fluctuations of principal. Despite the broad similarities, there are many differences between annuities and savings accounts that include liquidity, safety and taxation issues.


While the rules vary from bank to bank, many institutions allow you to make unlimited in-person or automated-teller-machine withdrawals from savings accounts. Withdrawals involving electronic transfers, telephone banking or online banking portals are limited to six per month under Federal Regulation D. While savings accounts are open-ended, fixed annuities have a set term time that can last for several years. In most instances, you can make penalty free withdrawals of principal at any time. However, you stand to lose your interest to surrender penalties if you withdraw your earnings before the annuity reaches maturity.


Savings accounts generally have variable rates of interest that fluctuate based on movements in indexes, such as the United States prime rate. In some instances rates are tiered, in which case account holders earn higher rates of interest when balances stay above certain minimums. By definition, a fixed deferred annuity has a rate of interest that remains the same for a set period of time. Depending on the annuity contract, the rate may remain steady for the entire annuity term or for the first year of the contract. If the rate resets during the annuity term, it cannot fall below the minimum rate guarantee included in the annuity contract.


The Federal Deposit Insurance Corporation insures savings accounts and other bank-held accounts up to $250,000, per account holder, per institution. If a bank goes bankrupt, depositors only risk losing funds in excess of the insurance coverage level. Neither the FDIC nor any other federally backed entity insures annuities since these products are regulated at the state rather than federal level. However, fixed annuities are insured by state guaranty funds, and coverage levels vary between states.


You can hold a savings account inside a tax-deferred retirement account, such as an IRA, but standard savings accounts are taxable. This means your earnings are subject to income tax. In contrast, annuities grow on a tax-deferred basis, and you only pay taxes when you make withdrawals. You pay a 10 percent tax penalty if you withdraw tax-deferred annuity funds before you reach the age of 59 1/2. You can protect the tax-deferred status of a matured annuity by rolling the cash into a new annuity contract. You must begin making taxable withdrawal from annuities holding retirement money when you reach the age of 70 1/2.