CDs vs MYGAs - Which Is Better?
The Annuity Man
When it comes to CDs (Certificates of Deposit) & MYGAs (Multi-Year Guarantee Annuities), they are pretty much the same from a structure standpoint, with only a couple of contractual nuances that make each of them unique. In essence, a MYGA is the annuity industry’s version of a CD. So it's impossible to hate all annuities, but love CDs.
Function & Taxation
CDs and MYGAs guarantee a contractual annual % for a specific period of time that you choose. Both fully protect your principal from loss. Both have no annual fees and pay the advisor a hidden commission that is very low, and that you don’t see taken out of your principal amount. In other words, it's a net transaction to you. CDs and MYGAs offer many choices of how long you want to lock in the guaranteed annual %. The longer the duration, the higher the interest rate guarantee.
It's a fact that CDs and 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.
Both CDs and MYGAs can be held in IRAs (i.e. qualified accounts), non-IRAs (i.e. non-qualified accounts), or Roth IRAs. The contractual guarantees are the same regardless of the account type.
Claims Paying Ability
Even conspiracy theorists wearing their tin-foil hats agree that FDIC coverage is still the best available, and CDs fall under that ultimate safety umbrella. Because "F" stands for federal, it's a good bet that the government is going to make sure that your CD funds are safe, by whatever means necessary.
Multi-Year Guarantee Annuities (MYGAs) are backed by the claims paying ability of the issuing carrier. For fixed annuities, each state has a "Guaranty Fund" that backs specific annuity types up to a specific dollar limit. You can check out your state of residence MYGA coverage here.
Mixed Fixed Ladder
Historically, CDs beat MYGA rates when you are looking to lock in your money in for short terms like 6 months, 12 months, and 24 months. MYGAs usually beat CD rates when your time horizon is 3 years, 4 years, 5 years, or longer. So if you wanted to put together a fixed rate ladder, the shorter maturities would be CDs…and the longer maturities would be MYGAs.
Combining CDs and MYGAs to maximize yield can be done with what I call a "Mixed Fixed Ladder" strategy. For example, if you had $500,000 you have earmarked for full principal protection, here is what a Mixed Fixed Ladder would look like. $100,000 in a 1 year CD. $100,000 in a 2 year CD. $100,000 in a 3 year MYGA. $100,000 in a 4 year MYGA. $100,000 in a 5 year MYGA.
No one can predict interest rate movements, so this strategy creates liquidity of one part of the ladder every year...starting after year one. Hopefully, you can roll that surrender charge free money to a higher rate and continue the ladder strategy ongoing.
You can also fully cash out the MYGA at the end of the surrender charge period and get your money back in full with interest. In addition, many (not all) MYGAs allow you to peel of the interest every year penalty free without touching the principal.
It’s important to shop all banks for CDs and all annuity carriers for MYGAs. It’s an active market for both CDs and MYGAs, so make sure to find the best fixed rates for your state of residence that fit your specific time frame.
So which is better….a CD or MYGA? The answer is neither. Both are fantastic contractually guaranteed products that can be used together to achieve your safe money goals.