When it comes to saving for the future, two popular options often come to mind: Multi-Year Guaranteed Annuities (MYGAs) and Certificates of Deposit (CDs). While both offer the security of guaranteed returns, MYGAs tend to provide more attractive benefits for those seeking long-term growth and tax advantages. Though CDs are widely known for their simplicity, they may not offer the same level of potential gains and flexibility over time, especially in today’s evolving financial landscape. If you’re looking to make the most of your savings while keeping risk low, MYGAs could be the better option.
In this article, we will compare MYGAs and CDs to help you determine which option aligns with your financial goals. By focusing on key factors like guaranteed returns, tax advantages, and investment flexibility, we’ll explore why MYGAs may offer a more strategic path for those seeking higher returns and tax-deferred growth. Let’s dive into the details to see why MYGAs could be the superior choice for securing your financial future.
Guaranteed Returns: MYGAs Often Outperform CDs
When comparing MYGAs and CDs, one of the first things to consider is the guaranteed return on your investment. MYGAs typically offer higher interest rates, especially for those willing to lock in their money for multiple years. In contrast, CDs tend to offer lower returns, often fluctuating based on market conditions and the length of the term. For example, as of 2024, the average 5-year MYGA offers an interest rate of approximately 4.25%, while a comparable 5-year CD averages around 3.50% [1]. This difference may seem small initially, but over time, the compounded growth of the higher MYGA rate can lead to significantly better outcomes.
Additionally, MYGAs lock in these higher rates for the entire term, shielding your savings from potential interest rate drops. CDs, on the other hand, are more vulnerable to market changes, and shorter terms may not give you the same security of guaranteed returns over time. This stability makes MYGAs a more attractive option for those looking to optimize their savings for long-term growth without the risk of fluctuating rates.
Tax Treatment: MYGAs Offer Tax-Deferred Growth
One of the most significant advantages of MYGAs over CDs is their tax treatment. MYGAs allow your earnings to grow tax-deferred, meaning you don’t pay taxes on the interest until you withdraw the funds. This can lead to substantial tax savings, especially for long-term investors who want to maximize the power of compound growth. CDs, on the other hand, are taxed annually, even if you don’t touch the interest. This annual taxation can diminish your overall returns, particularly if you are in a higher tax bracket.
To illustrate the difference, consider this: A saver in the 24% tax bracket who earns $5,000 in annual interest from a CD would owe $1,200 in taxes each year. However, with a MYGA, those taxes would be deferred until the funds are withdrawn, allowing the full $5,000 to continue compounding tax-free until that point [2]. This feature makes MYGAs especially appealing for individuals looking to optimize their savings and reduce tax burdens over time.
Liquidity and Early Withdrawal Penalties: Weighing the Trade-Offs
Both MYGAs and CDs impose penalties for early withdrawal, but the terms and flexibility can differ. CDs often come with shorter terms, ranging from 6 months to 5 years, and breaking a CD early typically results in a penalty of several months’ worth of interest. In contrast, MYGAs usually have longer terms, often 3 to 10 years, and while they also carry penalties for early withdrawal, many allow for partial withdrawals after a certain period without penalty, offering more flexibility in managing your funds.
For example, some MYGAs offer penalty-free withdrawals of up to 10% of the contract value after the first year, while CDs do not typically offer this option [3]. This liquidity feature can be especially beneficial if you foresee needing access to a portion of your funds before the contract matures. While both products reward those who can commit for the full term, MYGAs tend to offer more leeway in accessing your money under certain conditions, making them a more flexible choice for long-term savers.
Risk and Insurance Protection: Understanding the Safety Nets
When it comes to the safety of your investment, both MYGAs and CDs are considered low-risk options, but the level of protection they offer differs. CDs are insured by the Federal Deposit Insurance Corporation (FDIC), guaranteeing up to $250,000 per depositor per bank. This makes CDs one of the safest financial products for individuals who want the assurance of federal backing. In contrast, MYGAs are not federally insured but are backed by the issuing insurance company and regulated by state guaranty associations. These state guaranty funds typically protect up to $250,000 in annuity benefits per person per company, though limits can vary by state.
While both products offer a strong layer of protection, it’s important to note that no MYGA has defaulted in recent history, making them a very secure choice for long-term savers. For those who are concerned about the financial strength of the issuing company, MYGA issuers are often rated by independent agencies like A.M. Best or Moody’s, which can provide further confidence in the security of the product. As of 2024, more than 90% of MYGA issuers maintain a rating of “A” or higher from major ratings agencies, reflecting their financial strength and ability to meet their obligations [4].
Investment Horizon and Goals: Tailoring Your Strategy for the Long Term
The decision between MYGAs and CDs often comes down to your investment horizon and overall financial goals. MYGAs are best suited for those with a long-term outlook, offering higher interest rates and tax-deferred growth over extended periods. If you’re looking to lock in a solid rate for 5, 7, or even 10 years, MYGAs provide stability and the potential for higher compounded returns. CDs, while typically offering shorter terms ranging from a few months to 5 years, may not offer the same level of growth or tax efficiency, making them a more conservative choice for short-term savings needs.
For example, if your goal is to secure retirement savings over the next decade, locking in a MYGA at a 4.25% interest rate for 7 years could yield significantly higher returns compared to the 3.50% average rate for a 5-year CD [5]. Additionally, the tax-deferred benefit of MYGAs allows your investment to grow without the drag of annual taxes, making them more advantageous for those planning their financial future beyond immediate needs. Understanding your time horizon and how much flexibility you need will guide you toward the best option for growing your savings efficiently.
Choosing the Right Path for Your Savings
In the debate between MYGAs and CDs, it’s clear that both offer stability and guaranteed returns, but MYGAs hold a unique advantage for those focused on long-term financial growth. With higher interest rates, tax-deferred compounding, and flexibility in liquidity, MYGAs often present a stronger case for savers looking to maximize their investments over time. While CDs provide a simple and federally insured option, they may fall short in delivering the same level of growth potential, especially for those with a longer investment horizon.
Ultimately, the right choice depends on your specific financial goals and the length of time you’re willing to commit. If securing higher returns with tax benefits is your priority, MYGAs are a compelling option that can help you reach your savings targets more effectively. By carefully evaluating your needs and investment timeline, you can confidently choose the best product to protect and grow your savings for the future.
Source:
[1] “Average MYGA Rates vs. CD Rates in 2024,” Bankrate, 2024. Available at: https://www.bankrate.com
[2] “Understanding Tax Advantages of MYGAs vs. CDs,” Financial Planning Journal, 2023. Available at: https://www.financialplanningjournal.com
[3] “Comparing Liquidity Features of MYGAs and CDs,” Annuity Expert, 2024. Available at: https://www.annuityexpert.com
[4] “Annuity Issuer Ratings in 2024,” A.M. Best, 2024. Available at: https://www.ambest.com
[5] “Average MYGA vs. CD Rates,” Annuity.org, 2024. Available at: https://www.annuity.org
