Multi-year guaranteed annuity (MYGA) vs. certificate of deposit (CD)

Multi-year guaranteed annuities (MYGAs) and certificates of deposit (CDs) are two solutions that help protect your money while building it at the same time. Neither one is tied to market performance, so both can offer competitive yields.

But there are notable differences to be aware of before making a decision if one, or both, fit into your financial plan.

A multi-year guaranteed annuity is a type of fixed deferred annuity that guarantees a specific interest rate for a predetermined time period, typically between three and nine years. The interest rate on a MYGA is typically higher than that of a traditional fixed annuity, making it an attractive option for people looking for dependable, guaranteed growth.

A certificate of deposit is a type of account offered by banks and credit unions. You make a deposit and agree to leave your money in the account for a certain period of time in exchange for a higher interest rate. Because the interest rate is fixed, a CD can be a low-risk way to grow your savings.

Multi-year guaranteed annuities and certificates of deposit are both low-risk investment options that offer a fixed rate of return over a specified period. But there are some important differences between the two.

• MYGAs are offered by insurance companies. When opening a MYGA, you put down a lump sum of money that's considered a premium payment on your contract.

• CDs are offered by banks and credit unions. With a CD, the amount you put in is considered a deposit in an account.

• MYGAs are contracts sold by financial insurance companies, so they don't have FDIC protection. Instead, they’re backed by the insurance company that you purchase your MYGA from. It’s important to vet the strength and stability of the company you choose. Look at reports from A.M. Best, Fitch, Moody's or Standard & Poor's.

• Because CDs are accounts held with banking institutions, they're insured by the FDIC up to a certain amount, typically $250,000 per account holder per institution.

• MYGAs typically offer higher interest rates and longer time periods than CDs. Often periods range from 3-10 years. Generally, longer time periods offer higher interest rates.

• CDs are issued for time periods ranging in increments of months, such as 3 months, 6 months, 12 months, 18 months, 24 months or 36 months. The longest term is typically 60 months or five years.

The interest rates on both MYGAs and CDs are fixed for the entire term, so you’ll know exactly how much you'll earn.

• A MYGA is tax-deferred, so you won't pay taxes on your earnings until you withdraw the money. This helps your money accumulate even faster due to compound interest. With compound interest, your earnings grow based on your original investment and interest earned. In other words, the interest you earn each year gets added to your account balance. Then, the next year's interest is calculated based on the new, larger balance, so your earnings grow at an accelerated rate. Taxable withdrawals before age 59½ may also be subject to a 10% federal tax penalty.

• CD interest is taxed annually, which slows the growth of compound interest. However, it's worth noting that CDs held within an individual retirement account (also called a CD IRA), also can grow tax-deferred.

Both MYGAs and CDs are designed for you to leave your money in them until the end of the term.

• With MYGAs, surrender charges may apply, depending on the type of MYGA you choose. So, you may not only lose interest, but also principal—the money you originally contributed to the MYGA. In addition, some MYGAs have a Market Value Adjustment (MVA). MVA is an adjustment—either positive or negative—to the accumulated value if you make a partial surrender above the free amount or fully surrender your contract during the surrender charge period.

• With CDs, interest rate penalties may apply for early withdrawals. This means you may lose interest but not the principal amount contributed to the CD. This makes CDs more flexible than MYGAs with regard to early withdrawals.

• At the end of a MYGA term, you may have the option to renew for a new multi-year period; leave the money in a fixed account, select a settlement option for guaranteed annuity payments; or take a full or partial withdrawal.

• With a CD, you can withdraw all the money at the term's end, including your deposit plus the earned interest, or renew for the same term. You also could use the proceeds to purchase a new CD with a different term.

• A MYGA's death benefit will be distributed to beneficiaries and isn't subject to probate.

• For CDs, death proceeds may be subject to probate. However, that can be avoided if the CD is held inside an IRA.
  

A MYGA may be best if you want higher yields and plan to keep your money in the account for several years. A CD may be better if you're saving for a financial goal within one to three years and have a smaller amount to invest. You could run into higher minimum investment requirements with MYGAs.

Ultimately, the choice between a MYGA vs. CD depends on your personal financial goals. Carefully evaluate the terms and conditions of any CD or annuity before making your decision. A financial advisor can help you determine the benefits and risks of these options.