If you’re looking for a safe place to store your savings and lock in a guaranteed interest rate, there are two popular options to consider: certificates of deposit (CDs) and multi-year guaranteed annuities (MYGAs). Both offer fixed interest rates for a set period of time, making them attractive to savers who want predictable returns without the volatility of the stock market.
However, while MYGAs and CDs seem very similar on the surface, these two financial products work quite differently. Understanding the key differences between MYGA and CD can help you decide which option best fits your savings goals and schedule.
A multi-year guaranteed annuity is an insurance product that allows you to earn a guaranteed interest rate for a set period of time. MYGAs are considered a type of fixed annuity; They are typically used for retirement savings.
MYGA contracts, which are available through some insurance companies, typically last between three and ten years. MYGA rates can vary up to 7.5% or more, depending on the issuer and the amount of money you deposit. However, if you withdraw your money early, you may face fines of up to 10%.
One major advantage that MYGAs have over CDs and some other alternatives is that the growth is tax-deferred. That means that instead of having to pay taxes on the interest you earn each year, you pay when you make a withdrawal. 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 most banks and credit unions. CDs also allow you to earn a fixed interest rate for the entire term, which can last anywhere from a few months to several years. Today, the best CD rates are about 3%-4% APY.
As with MYGAs, you will typically 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 you’ve earned on the account.
Plus, you pay taxes on the CD interest you earn each year.
Read more: Fixed Annuities vs. CDs: Which is Better for Your Retirement Savings?
MYGAs and CDs have a lot in common. Both give you guaranteed returns with a low risk of loss. The main way you can end up losing money with a CD or MYGA is if you withdraw early and incur fees.
That said, a MYGA typically requires a larger, longer-term commitment. While the minimum deposit amount at MYGA typically ranges between $5,000 and $25,000, many CDs start at $500. Additionally, MYGA contracts typically last a minimum of three years, while CD terms typically start within a few months.
Whether a MYGA or a CD is better 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 likely your best option. Here’s what makes them a better option than CDs in these circumstances:
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MYGA rates can be significantly higher than CD rates.
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The interest is tax deferred, so you don’t pay taxes until you make a withdrawal.
Both features mean that your money can grow faster in a MYGA than in a CD. However, if you are under age 59½, the IRS may charge you a 10% penalty on any earnings you withdraw.
While it is possible to earn higher returns by investing elsewhere, such as the stock market, it is difficult to earn close to 7% with such a low-risk account. For that reason, MYGAs can be an excellent option for people who are retired or nearing retirement and who cannot risk a market downturn.
A CD is a better option than a MYGA when you save a smaller amount or for a shorter 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 great option. Investing in a CD will typically earn you much higher interest rates than a traditional checking or savings account. Plus, CDs can even be competitive compared to some 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 Cash Today?