As I always say, “There are no perfect answers to annuity questions, just bad sales pitches.” When it comes to CDs (Certificates of Deposit) & MYGAs (Multi-Year Guarantee Annuities), they are pretty much one in the same in structure, with only a couple of contractual nuances that make them unique. In essence, a MYGA is the annuity industry’s version of a CD.
Both guarantee a contractual annual % for a specific period of time. Both fully protect your principal from loss. Both have no annual fees. Both pay the advisor a hidden commission that is very low, and that you don’t see taken out of your $$ amount. Both offer many choices of how long you want to lock in the guaranteed annual %.
So we have established that CDs & MYGAs are very similar, so what set’s them apart?
- In a non-IRA account, you have to pay taxes on the interest every year with CDs. MYGAs allow that interest to grow tax-deferred in a non-IRA account. However, when you do pull money out of MYGAs, the money is taxable at ordinary income levels.
- CDs are backed by FDIC coverage, which is arguably the best protection for your money on the planet. MYGAs are backed by the claims paying ability of the issuing carrier. In addition, because all fixed annuities are regulated at the state level…MYGAs have additional protection from State Guaranty Funds. You can go to www.nolhga.com to see the $$ level your state provides.
Historically, CDs beat MYGA rates when you are looking to lock in your money in short terms like 6 months, 12 months, and 24 months. MYGAs usually beat CD rates when your time horizon is 3 years, 4 years, or 5 years. So if you wanted to put together a fixed rate ladder, the shorter maturities would be CDs…and the longer maturities would be MYGAs.
It’s important to shop all banks for CDs and all annuity carriers for MYGAs. The best place to go for CDs is www.bankrate.com and for MYGAs it’s www.theannuityman.com. It’s an active market for both CDs & MYGAs, so make sure to go to both sites to find the best national fixed rates that fit your specific timeframe goals.
So which is better….a CD or MYGA? The answer is neither. Both are fantastic and can be used together to achieve your safe money strategies.