MYGA vs. CD

Multi-year guaranteed annuities (MYGAs) are contracts with insurance companies that offer a fixed interest rate for a set period, ensuring your rate remains unchanged throughout the term.
However, unlike traditional fixed annuities that offer a fixed rate for only part of their term, multi-year guaranteed annuities allow you to lock in your rate for the entire contract, which typically lasts three to 10 years.

On the other hand, certificates of deposit (CDs) are a type of savings account that offers a fixed interest rate until maturity. Banks and credit unions sell them, and you can generally buy CDs with a term lasting anywhere from a month to five years.

Both investments present less risk than investing in equities such as stocks. However, on average, your returns tend to be lower than what you’d make on the stock market.

CDs and MYGAs also provide higher returns, generally speaking, than traditional savings accounts. Also, you benefit from a locked-in rate rather than the variable rate savings accounts generally offer.

Before buying either MYGAs or CDs, it’s important to understand how each investment works.

MYGAs are offered by insurance companies. The financial strength of the insurance company is important to ensure you’re paid as promised, as there’s no insurance provided by the Federal Deposit Insurance Company (FDIC) or other federal agencies. State guaranty associations may offer some protection for MYGAs but it is still important to do your due diligence in choosing an insurer.

When you purchase a MYGA, you know your rate upfront, and this fixed interest rate is guaranteed for the duration of the annuity contract. You can choose your term length, so you can choose a timeline that works for you. If you need to withdraw your money, you’ll pay a surrender fee if what you withdraw exceeds the MYGA’s percentage limit (10% of your balance, for example). The surrender fee decreases each year.

CDs, on the other hand, are offered by banks and credit unions. You can select a term of anywhere from a few months to multiple years.

FDIC insurance protects your investment up to allowable limits (typically $250,000 per person per account type). Your interest rate is fixed (in most cases) and guaranteed for the duration of the CD term, and you can select your term up front.

CDs do not offer tax-deferred growth, and you’ll typically be taxed on CD interest. Generally speaking, you’ll face penalties if you withdraw money from a CD before its maturity date (it’s typically equal to a certain number of days or months of interest).

CD rates are set based on the bank’s policies and the length of the CD term. In general, they are lower than the yields offered by MYGAs.

When you invest in MYGAs you don’t pay taxes on gains as you earn returns. Instead, taxes on gains are deferred until you withdraw money in retirement. On the other hand, CDs require you to pay taxes on interest annually. This is true even if you don’t withdraw your money.

Tax-deferred growth is especially valuable because you can pay taxes at a reduced rate when you withdraw money from your annuity in retirement, assuming you earn less later in life than when you open your MYGA.

Neither MYGAs nor CDs are very liquid investments—it’s hard to take out money without paying a penalty. However, your funds are more accessible in CDs than MYGAs.

MYGAs typically have more restrictive withdrawal terms than CDs, requiring you to pay surrender charges if you withdraw too much money too soon. These surrender charges often start out relatively high and drop each year. You can check with the insurer offering your annuity to find the surrender charge schedule.

On the plus side, some MYGAs do allow certain withdrawals over time, permitting you to periodically take money out up to a penalty-free limit.

CDs, on the other hand, may charge lower penalties. Plus, since you can opt for CDs with shorter maturity dates, you have more flexibility in how long you tie up your money. You also don’t have to wait until retirement age to make penalty-free withdrawals from CDs once they’ve matured.

Anytime you research investments, you should weigh the pros and cons of each carefully. Here are some of the biggest advantages and disadvantages of both MYGAs and CDs.

With both investments offering different pros and cons, which one is right for you?

Editor Norah Layne contributed to this article.