When it comes to safe, low-risk investments, Multi-Year Guaranteed Fixed Annuities (MYGA) and Certificates of Deposit (CDs) are two popular options. While both offer guaranteed returns, they have important differences that can significantly impact your financial plan. In this article, we’ll compare MYGA fixed annuities and bank CDs, highlight their pros and cons, and help you decide which might be the right choice for you.
What Are MYGA Annuities?
A MYGA fixed annuity is a type of fixed annuity that provides a guaranteed interest rate for a specific number of years, typically ranging from 3 to 10 years. Unlike CDs, MYGA annuities are offered by insurance companies, and while they are not backed by the FDIC, they are supported by the financial strength of the issuing insurer.
One of the main advantages of MYGA annuities is their ability to offer higher interest rates, especially over longer terms. Additionally, MYGA annuities grow tax-deferred, meaning you won’t owe taxes on the interest earned until you start making withdrawals. This feature makes them an attractive option for those looking to grow their savings over time without annual tax liabilities.
You can explore current MYGA annuity rates here.
What Are Bank Certificates of Deposit (CDs)?
Bank CDs are time deposits that lock in your money for a set period, from a few months to five years, in exchange for a guaranteed interest rate. CDs are issued by banks and backed by FDIC insurance, making them one of the safest financial instruments available. However, this safety comes at a cost—CDs generally offer lower interest rates than MYGA annuities, particularly for longer terms.
When investing in CDs, the interest is taxed annually, whether you withdraw it or not, and any early withdrawal of the funds may lead to penalties.
MYGA Fixed Annuity Rates vs CD Rates (2024)
When comparing MYGA annuities to CDs, the difference in interest rates is often a deciding factor. As of 2024, MYGA annuities typically offer significantly higher returns than CDs, especially for terms of 5 years or more.
| Term | MYGA Annuity Rate | Bank CD Rate |
|---|---|---|
| 3-Year Term | 5.10% | 4.20% |
| 5-Year Term | 5.50% | 4.00% |
| 7-Year Term | 5.60% | 4.30% |
Rates are approximate and subject to change.
For investors looking for guaranteed returns over a set period, MYGAs generally provide higher yields, making them more appealing for long-term savings and retirement planning.
Tax Treatment of Annuities vs CDs
One of the biggest distinctions between MYGA Fixed annuities and CDs is how they are taxed. With CDs, the interest you earn is taxed as ordinary income each year, even if you don’t withdraw it. This can reduce your overall return, particularly if you are in a high tax bracket.
In contrast, MYGA fixed annuities offer tax-deferred growth, meaning you won’t owe any taxes on the interest until you begin withdrawing the funds. This feature can be a significant advantage for those looking to maximize growth without the annual tax bite, especially for long-term financial goals.
Liquidity and Penalties
Both MYGA annuities and CDs impose penalties if you need to withdraw your money before the term ends. However, the specifics differ:
- Bank CDs: Early withdrawal typically results in a penalty of several months’ worth of interest, depending on the term length.
- MYGA Annuities: These often come with a surrender period, during which withdrawing your funds may result in a penalty. Many MYGA contracts, however, offer penalty-free withdrawals of up to 10% of the account value after the first year.
For investors who need more flexibility, the penalty-free withdrawal options with MYGA annuities can be an attractive feature compared to the stricter CD penalties.
Benefits of MYGA Fixed Annuities Over CDs
While both MYGA annuities and CDs are low-risk options, MYGAs offer several unique advantages:
- Higher Interest Rates: MYGA annuities typically provide higher fixed rates than CDs, particularly over longer time frames.
- Tax-Deferred Growth: The ability to defer taxes until you begin withdrawals allows for more growth compared to CDs, which are taxed annually.
- Retirement Income Options: MYGA annuities can be converted into a guaranteed income stream, which may be a valuable feature for retirees looking to secure a steady income.
These benefits make MYGA annuities a powerful tool for individuals looking to grow their wealth safely while also enjoying certain tax advantages.
When a CD Might Be a Better Choice
While MYGA annuities generally offer better rates and tax advantages, there are situations where a CD might be a better fit. If you’re looking for a short-term, ultra-safe investment and want FDIC insurance, a CD may be more appropriate. CDs also provide easy access to your funds at the end of the term, without the potential surrender charges that annuities might have.
For highly conservative investors who prioritize liquidity over higher returns, CDs remain a popular choice.
Conclusion: Which Option Is Right for You?
Both MYGA annuities and bank CDs offer stability and guaranteed returns, but they cater to different financial goals. If you’re seeking higher returns, tax-deferred growth, and potential retirement income, a MYGA annuity may be the right choice for you. However, if you prefer a simpler, FDIC-insured option for short-term savings, a CD may fit your needs better.
As with any financial decision, it’s important to consider your time horizon, tax situation, and overall financial goals. To learn more about how MYGA annuities can benefit your specific situation, check out our current rates or contact us for a personalized consultation.
FAQs
What is the difference between annuities and CDs?
Annuities, such as MYGAs, are issued by insurance companies and can offer higher rates and tax advantages, while CDs are issued by banks and are FDIC-insured.
Are annuities or CDs safer?
Both are low-risk options, but CDs are FDIC-insured, whereas annuities rely on the financial strength of the issuing insurance company.
Which has better rates, annuities, or CDs?
Generally, MYGA annuities offer higher interest rates compared to CDs, particularly over longer time periods.
Consult with a financial advisor to determine which option is best for your retirement goals and lifestyle.