MYGA vs. CD: Which is better for your retirement savings?
When you are planning for retirement, keeping your hard-earned money safe is a top priority. Many people look for financial tools that offer a guaranteed return without the scary ups and downs of the stock market.
Two of the most popular options for safe growth are certificates of deposit (CDs) and multi-year guaranteed annuities (MYGAs). Both options protect your principal investment, meaning you will not lose your initial deposit. However, they differ in how they handle taxes, how they access your money, and how your interest grows.
This guide breaks down the differences between MYGAs and CDs to help you decide which one best fits your financial future.
What is a CD?
A certificate of deposit, or CD, is a special savings account offered by a bank or a credit union. When you purchase a CD, you agree to leave your money in the bank for a set amount of time. This timeframe is called a term and can last from a few months to several years.
In exchange for leaving your money untouched, the bank pays you a fixed interest rate. According to the Federal Deposit Insurance Corporation (FDIC), traditional bank CDs are backed by the federal government up to $250,000 per depositor, per insured bank. This backing makes them incredibly safe.
What is a MYGA?
A multi-year guaranteed annuity, or MYGA, is a specific type of fixed annuity. Instead of a bank, a MYGA is a contract between you and a trusted insurance company.
Just like a CD, you give the company a lump sum of money, and they guarantee to pay you a fixed interest rate for a specific number of years, usually between three and ten years. Because your rate is locked in, your money grows safely regardless of what happens in the stock market.
How do MYGAs and CDs compare?
While these two savings tools seem identical on the surface, they have distinct differences that can impact your retirement income strategy.
Taxation and Growth
The biggest difference between a MYGA and a CD is how your earnings are taxed.
With a CD, you must pay taxes on the interest you earn every single year, even if you do not withdraw the money and let it roll over. The bank will send you a tax form annually, and that interest is taxed as regular income.
With a MYGA, your money grows on a tax-deferred basis. This means you do not pay taxes on your interest gains until you withdraw money. Because taxes are postponed, your interest can compound much faster over time.
Access to Your Money
While both accounts expect you to leave your money alone for the entire term, exceptions that involve early withdrawals are handled differently. If you need to break a CD early, the bank will charge you an early withdrawal penalty. This fee is usually equal to a few months of interest. After you pay the fee, you can withdraw all your money.
MYGAs are less flexible because they are designed for long-term retirement planning. If you take out more money than allowed before the contract ends, the insurance company charges a penalty called a surrender charge. In addition, the Internal Revenue Service (IRS) imposes an 10% tax penalty on any annuity earnings withdrawn before you reach age 591⁄2. However, many MYGAs do allow you to withdraw a small amount, often 10% of your account value, each year without penalty.
Safety Guarantees
Both options are highly secure, but they rely on different protective nets. CDs are insured by the federal government through the FDIC. MYGAs are not backed by the federal government. Instead, they are backed by the financial strength of the issuing insurance company and are further protected by state guaranty associations.
Choosing Between a MYGA and a CD Feature Certificate of Deposit
Feature | Certificate of Deposit (CD) | Multi-Year Guaranteed Annuity (MYGA) |
|---|---|---|
Issuer | Banks and credit unions | Insurance companies |
Tax Status | Taxed annually | Tax-deferred growth |
Best For | Short-term goals (1 to 5 years) | Long-term retirement (Age 591⁄2 and older) |
Early Withdrawal | Penalty of lost interest | Surrender charges and IRS penalties |
Summary of Your Retirement Options
Neither option is better than the other; they simply serve different purposes. A CD is an excellent choice if you want a short-term place to store your cash and might need access to it in a couple of years. A MYGA is often a stronger option for pre-retirees or seniors who want to maximize their long-term savings through tax deferral and do not plan to touch the funds until retirement. Talking with a licensed professional can help you evaluate recognized insurance carriers to find the right path for your goals.
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Disclaimer: This content is for informational and educational purposes only and does not constitute professional financial, investment, or legal advice. While we strive for accuracy (see our Editorial Standards), financial markets and laws change frequently. We recommend consulting with a qualified financial professional or attorney before making any major decisions.
