If you’re looking for a safe place to keep 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 appealing to savers who want predictable earnings 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 a MYGA vs. CD can help you decide which option better fits your savings goals and timeline.
A multi-year guaranteed annuity is an insurance product that allows you to earn a guaranteed interest rate over a set period of time. MYGAs are considered a type of fixed annuity; they’re usually used for retirement savings.
MYGA contracts, which are available through some insurance companies, usually last anywhere from three to 10 years. The rates on MYGAs can range up to 7.5% or higher, depending on the issuer and how much money you deposit. However, if you withdraw your money early, you may face penalties as high as 10%.
One major advantage that MYGAs have over CDs and some other alternatives is that the growth is tax-deferred. That means 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 gain 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 over the full term, which can be anywhere from a few months to several years long. Today, the best CD rates are about 3%-4% APY.
Similar to 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 equivalent to several months’ worth of the interest you’ve 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 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 a MYGA is if you make an early withdrawal and incur fees.
With that said, a MYGA typically requires a larger and more long-term commitment. While the minimum deposit amount on MYGAs is often somewhere between $5,000 and $25,000, many CDs start at $500. Additionally, MYGA contracts usually last a minimum of three years, while CD terms usually start at just a few months.
Whether a MYGA or CD is best for you depends on your situation. Here’s what you need to know in order to choose between the two accounts.
If you have roughly $5,000 or more in savings that you don’t need access to for at least a few years, a MYGA is likely your best option. Here’s what makes them a better choice than CDs in these circumstances:
MYGA rates can be significantly higher than CD rates.
Interest is tax-deferred, so you don’t pay taxes until you make a withdrawal.
Both of these features mean your money can grow faster in a MYGA than a CD. However, if you’re under age 59½, the IRS may charge a 10% penalty on any earnings you withdraw.
While you may be able to earn higher returns by investing elsewhere, such as the stock market, it’s difficult to earn near 7% with such a low-risk account. For that reason, MYGAs can be a great option for people who are retired or nearing retirement and can’t risk a market downturn.
A CD is a better option than a MYGA when you’re saving a smaller amount or you’re saving for a shorter time frame.
If you’re setting money aside for a short- to mid-term goal, such as buying a car within the next two years, a CD can be a great choice. Investing in a CD will typically earn you much higher rates than a checking account or traditional savings account. Plus, CDs can even be competitive in comparison 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?
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