Jumbo CDs vs. High-Value Annuities: Which Offers Better Returns for Large Deposits?

When saving, you may prefer an account that offers a higher return on your money compared with a typical savings account, especially if you have a large sum. Jumbo certificates of deposit and high-value annuities are low-risk savings options, but it's prudent to know the differences between them before deciding which one aligns with your savings goals.

This guide explores the similarities and differences between these savings measures so you understand how they work to help you reach your financial goals.

What are annuities?

Annuities are a savings tool issued by an insurance company. You contribute to them either with one lump sum or by paying premiums over time. Many people use annuities as a long-term savings strategy for retirement. Your annuity contributions earn interest, and you can receive payments from the combined contributions and interest later, although some annuities pay out immediately. The amount of your monthly payments depends on several factors, including the type of annuity, your age and life expectancy, the interest earned, and the annuity term.

A high-value annuity is one you fund with a large sum. These are the three main types of annuities:

• Fixed annuity: With a fixed annuity, your contribution earns a fixed interest rate that's set when you sign the contract. This annuity has the lowest risk, but you may earn the least interest on your contribution.
• Variable annuity: When you contribute to a variable annuity, your money is invested in assets such as bonds or mutual funds. You can choose how to allocate the money, and your earnings depend on the performance of those assets.
• Fixed index annuity: A fixed index annuity credits interest based, in party, on the performance of an index such as the S&P 500. This type of annuity typically has a cap to limit credited interest and a floor to help reduce risk caused by market fluctuations.

What are jumbo CDs?

A CD allows you to earn interest on the amount you put into it for a set period. This is typically a short-term way to earn interest on money you don't need immediately but want to increase in value for a later time. You can fund a standard CD with as little as $500, while a jumbo CD requires a minimum deposit of $100,000. You can earn more interest from a jumbo CD since you're putting a larger sum of money into it.

Banks and credit unions issue CDs, which are a low-risk way to save money in the short term. You won't lose the amount you initially put into a CD, and the interest rate is usually fixed. You'll always accrue some gains, although they may be minimal compared with riskier investments. You may achieve a higher return from a jumbo CD than one you fund with a lower sum. Depending on the type of CD you have, your interest rate can fluctuate during its term.

Jumbo CDs vs. high-value annuities

While jumbo CDs and high-value annuities are low-risk savings options, you should be aware of several differences before you choose either product. Jumbo CDs are issued by banking institutions, while annuities are issued by insurance companies. Taxes for these savings plans are also different. For CDs, you pay income taxes on the amount you earn yearly. With annuities, you don't pay income taxes until you start receiving payments, usually in your retirement years.

You'll need at least $100,000 to purchase a jumbo CD. For an annuity, you can choose how much you want to contribute. During an annuity's accumulation phase, the period when you can make contributions to the annuity, you may have the option to continue to add money to it. Some annuities have a minimum threshold, but it's often much less than the $100,000 a jumbo CD requires. You can potentially increase the amount in your annuity over time without needing such a large amount upfront.

A jumbo CD requires you to commit your money for a set period, ranging from a few months to several years, at the end of which the account closes and pays you all the money you put in plus the interest in a lump sum. When you contribute to an annuity, you typically agree to leave your money with the insurance company for a longer period, with most terms lasting between five and 30 years. At the end of the term, you can receive regular monthly payments, sometimes lasting for the rest of your life.

Institutional investors often use jumbo CDs as a low-risk way to earn interest for their clients in the short term. Annuities suit those who want a long-term savings option that provides an income stream in retirement.

Pros and cons of jumbo CDs

There are benefits and disadvantages to using jumbo CDs. Consider the following advantages:

• FDIC insurance: Because you purchase a jumbo CD from a bank, it comes with FDIC insurance. This means that your money is protected up to $250,000 if the bank fails.
• Fixed terms and rates: Your jumbo CD has a fixed term and set interest rate when you deposit your money, making it less tempting to access the funds before the end of the term.
• Higher returns: A jumbo CD requires a large deposit upfront, which may allow you to earn an interest rate that exceeds other low-risk options.

Some disadvantages of putting your money into a jumbo CD include:

• Liquidity: Jumbo CDs have little to no liquidity. Once you put money into it, you can't access it easily until the CD matures, or the term expires.
• Penalties for early withdrawal: If you need the money in your CD for an emergency or other investment, you may be subject to steep penalties for withdrawals before the CD matures.
• High cost, low returns: Your jumbo CD may have a higher interest-earning potential compared with a standard savings account, but the earnings will be minimal in contrast to other, higher-risk investment options. You'll also need a minimum of $100,000 to buy this type of CD.

Pros and cons of annuities

Annuities also have their benefits and drawbacks, and it's important to consider your financial goals before signing an annuity contract. Because you usually leave your money in a high-value annuity for a longer term, the returns can be better than a jumbo CD that has a shorter period for earning interest.

The advantages of contributing to an annuity include:

• Steady income: Annuities can offer the option to receive steady income payments at the conclusion of your accumulation phase.
• Low-risk savings plan: Because the principal of your annuity doesn't decrease, it's a low-risk, long-term option for saving money for retirement.
• Variety of options: With an annuity, you have several options that allow you to take a more customized approach to growing your money in a way that helps you meet your financial goals.

The disadvantages of annuities can include:

• Penalties for early withdrawal: Like jumbo CDs, you can face steep penalties if you withdraw money early from your annuity. Your money also is tied up for a longer period.
• Not FDIC-insured: An annuity doesn't have FDIC insurance, which means your money is at risk if the insurance company fails before you receive payments,.
• Fees and commissions: Some annuities have fees and commissions that can detract from your earning potential. Discuss these fees and commissions with a financial advisor to understand how they might affect your payments.

Choosing between jumbo CDs and annuities

Whether a jumbo CD or annuity is right for you will depend on several factors. You can consider jumbo CDs if you want to save money and earn a higher interest in the short term. Annuities are best if you have long-term financial goals aimed at retirement. A jumbo CD can be straightforward, but annuities offer many options that can make them challenging to understand. An annuity is the ideal choice if you want a steady income stream in retirement, while a CD may be better if you want to save money in the short term.

Make the right move with your financial plan

We all have different goals for our money. Knowing what you want now, and in the future, will ensure you meet your financial goals. Both jumbo CDs and annuities can have a place in your financial planning strategy. Use this guide to help you decide how and when these savings tools are a good fit for your money.

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