MYGA vs. CD: Which One Makes Sense for Your Safe Money?
If you're 55 or older and have money you don't want in the stock market, you've probably looked at CDs. You may also have heard about something called a MYGA and wondered whether it's just an annuity sales pitch with a new name.
It isn't. A MYGA is about the simplest product an insurance company sells, and for the right money it can do a better job than a CD. For other money, a CD is the better tool. Here's how to tell the difference.
What each one is
A CD (certificate of deposit) is a bank deposit. You agree to leave your money with the bank for a set term, such as 1, 3 or 5 years, and the bank pays you a fixed interest rate.
A MYGA (multi-year guaranteed annuity) is the insurance-company version of the same idea. You deposit a lump sum, and the insurer guarantees a fixed interest rate for a set term, usually 3 to 10 years. It has no stock market link, no caps, no participation rates, and no riders to decode. You know your rate on day one.
Where they're the same
Both give you a fixed rate for a fixed term, both protect your principal, and both are meant for money you can leave alone until the term is up. If you've been comfortable with CDs, a MYGA will feel familiar.
Where they're different
Taxes. This is the biggest difference for most people. CD interest is taxed every year, even if you never touch it, and the bank sends you a 1099 each January. A MYGA's interest grows tax-deferred, so you pay no tax until you withdraw it. When you do withdraw it, the interest is taxed as ordinary income. Withdrawals of earnings before age 59½ generally carry a 10% IRS penalty, which is one reason MYGAs fit people closer to retirement. Inside an IRA, the tax deferral doesn't matter, because the IRA is already tax-deferred.
Rates. MYGAs have often paid more than bank CDs of the same length, but rates change constantly. Don't take that as a given. Compare current rates side by side for the same term before you decide.
Getting your money out early. Cashing in a CD early usually costs you a few months of interest. Leaving a MYGA early usually costs a surrender charge, which is often larger and typically declines each year of the term. Many MYGAs let you withdraw a portion, often up to 10% a year, without a charge. Some also include a market value adjustment that can raise or lower what you get back if you surrender early. Read the surrender schedule before you sign anything.
What backs your money. CDs are covered by FDIC insurance up to $250,000 per depositor, per bank, per ownership category. A MYGA is backed by the insurance company's ability to pay its claims, with a state guaranty association as a backstop up to limits that vary by state. That makes the insurer's financial strength rating worth checking. I stick with carriers that have strong ratings, and you should ask anyone who quotes you a MYGA which carrier it is and how it's rated.
At the end of the term. When a CD matures, you take the money or roll it into a new CD. When a MYGA term ends, you typically get a window to withdraw the money, renew, or move it to another annuity without triggering taxes.
The downsides of a MYGA, plainly
Your money is less accessible than it is in a CD. If there's a real chance you'll need it during the term, a MYGA is the wrong place for it.
The 59½ rule matters if you're younger.
Withdrawn interest is taxed as ordinary income, not at capital gains rates.
If interest rates rise after you lock in, you're stuck with your rate until the term ends. (CDs have the same problem.)
Who a MYGA tends to fit
People 55 and older with savings beyond their emergency fund
Money sitting in a taxable account, where tax deferral actually helps
A time frame that matches the term, such as money you know you won't touch for five years
People who want a fixed rate and nothing to monitor
Who should stick with CDs
Money you may need on short notice
Anyone under 59½ who might need the interest
Savers who want FDIC coverage specifically
Short time frames, where a 1-year CD or a Treasury may be the simpler answer
How I'm paid
I'm an independent insurance broker, and when I place a MYGA, the insurance company pays me a commission. You should know how anyone giving you advice gets paid. My hourly financial planning is a separate service and billed separately.
The bottom line
A MYGA is not a CD replacement for all your safe money. It's a good tool for the slice you're confident you won't need during the term, especially money in a taxable account. Keep your emergency fund in the bank. (For more on the tradeoffs, read MYGA Annuities: The Good, the Bad, and the 55+ “Safe Money” Case.) For the rest, compare current CD and MYGA rates for the same term, and look at the after-tax picture rather than just the headline rate.
If you'd like a side-by-side comparison for your situation, call me at 720-647-6501 or book a time on the MYGA page.
AMA Financial Partners is a licensed independent insurance agency in Louisville, Colorado. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. This article is general information, not tax or legal advice. Consult a tax professional about your situation.
Comments