MYGA vs. CD: What the Rate Doesn't Tell You

If you're comparing a bank CD with a multi-year guaranteed annuity, a MYGA, they can look almost identical on the surface. Both pay a fixed rate. Both lock that rate for a set number of years. Both are meant for money you don't want exposed to the stock market. But under the hood they work differently, and those differences matter more than the rate does.

Who Stands Behind It

A CD is a bank deposit, insured by the FDIC up to the coverage limits. A MYGA is an insurance contract. Its guarantees are backed by the claims-paying ability of the insurance company that issues it. Each state also has a guaranty association that provides a layer of protection up to that state's limits.

The financial strength of the insurer is part of the comparison, not an afterthought.

How It's Taxed

CD interest is generally taxable every year, whether you take it or let it ride. Interest inside a non-qualified annuity generally grows tax-deferred until you withdraw it, at which point the gains are taxed as ordinary income. Withdrawals before age 59 1/2 may also face a federal tax penalty.

Tax deferral can help. It isn't automatically better for everyone, and whether it helps you depends on your own tax situation.

Getting Your Money Out Early

Most CDs charge an early withdrawal penalty, often a few months of interest. Most MYGAs use a surrender schedule instead: a charge that applies to withdrawals above a free amount during the guarantee period, often declining each year. Many contracts allow a penalty-free withdrawal of a portion of the value each year. The details vary widely by product, so this is one of the things worth reading closely before you commit money.

Term Lengths

CDs often run from a few months to five years. MYGAs commonly run from three to ten years, and rates usually differ by term.

So Which Is Better

It depends on your timeline, your tax situation, and how much of the money you might need before the term ends. The rate is a starting point, not the whole answer.