Key Takeaways
- CDs are FDIC-insured, but offer lower rates of return when compared to MYGAs.
- CDs suit short-term goals, while MYGAs excel in long-term stability and income, making them both valuable tools for retirement planning.
- Unlike CDs, which generate taxable annual interest, MYGAs allow growth to compound tax-deferred, significantly boosting returns over time
Certificates of deposit (CDs) and multi-year guaranteed annuities (MYGAs) are staples of conservative fixed-income strategies, alongside other products such as corporate bonds, treasuries and fixed-income funds. While CDs and MYGAs offer secure, guaranteed rates of return, they differ in many essential ways, which impact how they should be utilized.
Compare CD and MYGA Rates
As fixed-income products, one of the most important factors to compare will be the available interest rates for each product. Both products have similar value: reliable, guaranteed rates of return over a predetermined period.
CDs typically offer a lower interest rate than MYGAs of similar terms. As of 12/10/24, a five-year MYGA offers 5.65% vs. 4.55% from a CD.
Your Trusted Partner in Retirement Planning
One reason for this is risk exposure. While both products explicitly guarantee the principal and interest rates, only CDs offer FDIC insurance through the bank issuing the CD. It is incumbent on the investor in an annuity to choose a well-rated and well-capitalized insurance company.
Poorly rated insurers are more likely to offer higher rates of return to attract consumers. Even highly rated companies will offer higher rates than comparable CDs to compensate investors for the (slight) added risk compared to the FDIC-insured CD.
Top Rates by Term
| Terms | CD | MYGA |
| One year | 4.50% | 5.70% |
| Two years | 4.40% | 5.40% |
| Three years | 4.70% | 5.50% |
| Four years | 4.45% | 5.20% |
| Five years | 4.55% | 5.65% |
Understanding Tax Consequences
In consideration of the expected total rate of return, both the pre-tax and post-tax yield are relevant when measuring one product against the other.
One of the major differences between CDs and MYGAs is the taxability of the growth. CDs not already sheltered within an IRA or retirement account will generate interest income that will be taxable in the year it is received. Unlike CDs, MYGAs are annuities that benefit from tax-deferred growth for as long as the money remains inside the annuity. Over many years, this can improve the annuity’s performance by a substantial margin.
To calculate the comparable return of each investment, assume a similar interest rate and multiply that interest rate by a factor that subtracts your effective tax rate from one. Your effective tax rate is the final rate you pay on your annual income.
For instance, assume you pay an effective tax rate of 20%, and your CD and MYGA interest rates are 5.5%. Your CD would have an after-tax rate of return of 4.4% (5.5% times 0.8), while your MYGA would continue to have a 5.5% rate of return because it is unaffected by taxes year-to-year. While it is true that you may pay income taxes on the proceeds from your MYGA at the time of withdrawal, you have more control over how much and when these withdrawals occur. You will likely have a much lower tax rate in retirement than when working.
Choosing the Right Product for You
To determine which type of annuity may be the right one for your situation, it is important to outline your goals, timeframe for investing and preferences for flexibility, growth and current or future guarantees. While CDs and MYGA are commonly compared, they do have clear differences.
Benefits of Certificates of Deposit
CDs offer the benefit of FDIC insurance (up to $250,000 per account, per bank), an explicit government guarantee. Annuities, while guaranteed by the issuing institution, cannot match that level of security. This is available on all new and secondary market CDs across all available terms.
CDs typically offer shorter terms than are available with annuities. Many banks offer terms as short as one month up to five years. CDs also typically have lighter penalties or the option to avoid early withdrawal penalties altogether on certain products. Exiting a CD before maturity typically forgoes three months of interest. No-penalty CDs allow withdrawal anytime but usually offer a lower rate of return.
Benefits of Multi-Year Guaranteed Annuities
MYGAs are better utilized for longer-term investment horizons. Terms are measured in years, and most insurers offer contracts lasting between one and 10 years. While annuities usually offer less liquidity and higher penalties for withdrawal before maturity, they provide valuable tax-deferred growth at higher rates of return than CDs. This will add up over a multi-year or multi-decade timeframe.
Secure Retirement Without Hidden Fees
Annuities are primarily designed for retirement savings and creating an income stream in retirement. It is easy to convert a deferred annuity into an immediate income annuity, creating a reliable monthly income payout for life.
Frequently Asked Questions
The main difference is tax treatment and insurance. CDs are FDIC-insured, while MYGAs are not but offer higher rates and tax-deferred growth, which can lead to higher long-term returns.
MYGAs are safe, but not FDIC-insured. Their safety depends on the financial stability of the issuing insurance company, so it’s important to choose a well-rated insurer.
MYGAs are typically better for retirement due to their higher rates and tax-deferred growth. CDs are better for short-term savings or if you need liquidity. Regardless, it’s important to consult with a financial advisor to plan for your personal retirement goals.
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