If you’re looking for a safe place to keep your savings — and lock in guaranteed interest — there are two popular options to consider: certificates of deposit (CDs) and multi-year guaranteed annuities (MYGAs). Both offer fixed interest rates for a fixed period of time, making them attractive to savers who want predictable income without the volatility of the stock market.
However, while MYGAs and CDs look very similar on the outside, these two financial products work very differently. Understanding the key differences between MYGA vs. A CD can help you decide which option best fits your savings goals and timeline.
A guaranteed multi-year annuity is an insurance product that allows you to receive guaranteed interest over a fixed period of time. MYGAs are considered a fixed currency; they are usually used for retirement savings.
MYGA contracts, available from other insurance companies, typically last anywhere from three to 10 years. Rates on MYGAs can be as high as 7.5% or more, depending on the issuer and how much you deposit. However, if you withdraw your money early, you may face penalties of up to 10%.
One major advantage MYGAs have over CDs and other options is that the growth is tax-deferred. That means that instead of paying tax on your earnings each year, you pay when you withdraw the money. As a result, your money has more time to earn compound interest.
Read more: Fixed rate vs. variable rate: What’s the difference, and why does it matter?
A certificate of deposit (CD) is a type of deposit account that can be found at many banks and credit unions. CDs also allow you to earn a fixed interest rate over a full term, which can be anywhere from a few months to a few years in length. Today, the best CD rates are around 3%-4% APY.
Similar to MYGAs, you will face a penalty if you want to withdraw money from your CD before the account reaches maturity. But with CDs, the early withdrawal penalty is usually equal to several months’ worth of interest earned on the account.
Additionally, you pay taxes on the CD interest you earn each year.
Read more: Fixed annuities vs. CDs: Which is better for retirement savings?
MYGAs and CDs have a lot in common. Both offer you guaranteed returns with low risk of loss. The biggest way you can end up losing money on a CD or MYGA is to withdraw early and incur fees.
With that said, MYGA generally requires a significant and long-term commitment. While the minimum deposit amount for MYGAs is usually between $5,000 and $25,000, most CDs start at $500. Additionally, MYGA contracts typically last at least three years, while CD terms typically start in just a few months.
Whether MYGA or CD is right for you depends on your situation. Here’s what you need to know to choose between the two accounts.
If you have about $5,000 or more in savings that you don’t need to access for at least a few years, MYGA is probably your best option. Here’s what makes them a better choice than CDs in these situations:
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MYGA rates can be much higher than CD rates.
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Interest is tax-deferred, so you don’t pay taxes until you withdraw the money.
Both of these factors mean that your money can grow faster in a MYGA than a CD. However, if you are under age 59½, the IRS may charge a 10% penalty on any benefit you withdraw.
While you may be able to earn high returns by investing elsewhere, such as the stock market, it is difficult to earn nearly 7% with a low-risk account. For that reason, MYGAs can be a good option for people who are retired or close to retirement and can’t risk a market downturn.
CD is a better option than MYGA if you are saving a small amount or saving for a short period of time.
If you’re setting aside money for a short- to medium-term goal, such as buying a car within the next two years, a CD can be a good choice. Investing in a CD will earn you much higher returns than a checking account or regular savings account. In addition, CDs can even compete against other high-yield savings accounts (HYSAs). And you’ll still have penalty-free access to your money at a predetermined time.
Read more: Multi-year guaranteed annuity (MYGA) vs. high-yield savings account (HYSA): Where should you put your money today?
