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 providing the opportunity to build returns at the same time. Neither a MYGA or CD is tied to market performance, but both can offer competitive yields.

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 relatively low-risk investment options that offer a fixed rate over a specified period of time. There are some key differences between the two.

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

• CDs are accounts 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 purchased your MYGA from. It’s important to vet the strength and stability of the company you choose by reviewing 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. 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.

• A MYGA is tax-deferred, so earnings are not taxed until the money is withdrawn. This helps your invested dollars accumulate at a faster rate 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), may also grow tax-deferred.

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

• With MYGAs, surrender charges may apply if you withdraw more than the annual maximum amount allowed. As a result, you may not earn interest on a portion of the money you originally contributed to the MYGA. Withdrawals subject to surrender charges in the MYGA version with Market Value Adjustment (“MVA”) are also subject to the interest rate on the date of withdrawal. 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 a higher yield and plan to keep your money in the annuity for several years. You could also run into higher minimum investment requirements with a MYGA. 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.

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.