MYGAs vs. CDs: How Multi-Year Guaranteed Annuities Really Compare

If you have money sitting in CDs, you've probably heard someone mention a MYGA as an alternative. A multi-year guaranteed annuity (MYGA) is often described as "an insurance company's version of a CD," and that's a decent starting point. Both pay a fixed rate for a set number of years. But they're built differently, they're taxed differently, and they're protected differently. Those differences matter more than the rate on the front page.

Here's a plain side-by-side so you can decide which one fits the job you have in mind for the money.

What Each One Is

• A CD (certificate of deposit) is a bank deposit. You agree to leave the money in for a set term, and the bank pays a fixed interest rate.
• A MYGA is a fixed annuity contract with an insurance company. You agree to leave the money in for a set term (commonly 3 to 10 years), and the insurer credits a fixed rate that's guaranteed for that term.

Neither one goes up and down with the stock market. You know your rate going in.

Difference #1: How the Interest Is Taxed

This is the biggest practical difference for most people. CD interest is generally taxable every year, even if you leave it in the CD and don't touch it. Your bank sends you a 1099 each year.

Interest in a MYGA held outside an IRA is tax-deferred. You don't pay tax on the growth until you take money out. That lets the interest compound on the full amount, and it lets you choose when to take the income, such as after you retire, when you may be in a lower bracket.

The trade-off: when you do take money out of a non-qualified annuity, the gains come out first and are taxed as ordinary income. And if you take gains out before age 59½, the IRS generally adds a 10% penalty on top, with some exceptions. CDs don't have that age rule. For more on how the money going in affects the tax coming out, see tax-free annuity structures, explained.

Difference #2: Getting Your Money Out Early

Both products expect you to stay for the full term, and both charge you if you don't.

• CDs usually charge an early withdrawal penalty equal to a certain number of months of interest.
• MYGAs have a surrender charge schedule, a percentage that usually starts higher and steps down each year. Some also have a market value adjustment (MVA) that can raise or lower what you receive if you leave early.

Many MYGAs soften this with a free withdrawal allowance each year, often around 10% of the value or the interest earned, depending on the contract. Read that section of the contract before you buy, not after you need the money.

Difference #3: What Backs the Guarantee

CDs at FDIC-insured banks are covered by FDIC insurance up to $250,000 per depositor, per bank, for each ownership category.

Annuities are not bank products and are not FDIC-insured. A MYGA's guarantee is backed by the financial strength and claims-paying ability of the insurance company that issues it. That's why the carrier matters as much as the rate. Before you buy, look up the company's current financial strength ratings from agencies like A.M. Best and S&P, and be cautious about choosing a contract on rate alone.

Difference #4: What Happens at the End of the Term

When a CD matures, it often rolls into a new CD automatically unless you act. A MYGA works similarly: at the end of the guarantee period, there's usually a short window (often around 30 days) to withdraw, move the money, or renew. If you do nothing, many contracts renew at whatever rate the insurer is offering then, sometimes with a new surrender schedule.

A non-qualified MYGA can also be moved to another annuity through a 1035 exchange without triggering taxes at the time of the move, or turned into a stream of lifetime income. That flexibility at the finish line is one reason people use MYGAs as a stepping stone toward retirement income. More on that in how annuities create guaranteed lifetime income.

Difference #5: Passing It On

Both can go directly to the people you choose. CDs can usually have a payable-on-death beneficiary. Annuities name beneficiaries in the contract, so the money generally passes outside of probate. One thing to know: when heirs inherit an annuity, the deferred interest is taxable to them as ordinary income when they take it out.

When a CD May Fit Better

• You might need the money within the next year or two.
• You're under 59½ and may want the interest before then.
• You want federal deposit insurance specifically.
• You're in a low tax bracket now, so paying tax each year isn't much of a drag.

When a MYGA May Fit Better

• The money is for later, and you're comfortable leaving it alone for the full term.
• You'd rather not pay tax every year on interest you aren't spending.
• You want the option to turn the money into lifetime income down the road.
• You're near or past 59½, so the early withdrawal penalty matters less.

Plenty of people use both: CDs or savings for money they may need soon, and a MYGA for money they won't need for several years.

Let's Compare Your Options Side by Side

I'm based in League City and help people across Clear Lake, Friendswood, Webster, and the Bay Area compare fixed options without the sales pitch. If you have CDs coming due, or an older annuity reaching the end of its term, bring your statements and we'll lay out the after-tax picture for each choice. If you already own an annuity, my annuity review checklist is a good place to start.

Frequently Asked Questions

Is a MYGA FDIC-insured like a CD?

No. MYGAs are insurance contracts, not bank deposits, so they are not FDIC-insured. The guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company, which is why checking the carrier's ratings matters.

Do I pay taxes on MYGA interest every year?

Not if the MYGA is held outside a retirement account. The growth is tax-deferred until you withdraw it, and withdrawals of gains are taxed as ordinary income. Withdrawals of gains before age 59½ may also face a 10% IRS penalty unless an exception applies.

Can I get money out of a MYGA before the term ends?

Usually some, yes. Many contracts allow a free withdrawal each year, often around 10% or the interest earned. Taking more than that during the surrender period typically triggers a surrender charge, and possibly a market value adjustment.

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