When it comes to securing your money for the future, you have several options. Two common choices that come up frequently are Multi-Year Guaranteed Annuities (MYGAs) and Certificates of Deposit (CDs). While both provide a stable way to grow your savings with low risk, they have distinct differences. Let’s dive into each one and figure out which might be a better fit for your financial goals.
CDs: The Traditional Choice
Certificates of Deposit (CDs) are a classic, low-risk investment that many people are familiar with. While I don’t sell CDs, I certainly appreciate their simplicity and security. Here’s what you can expect from a CD:
- Principal Protection: Your initial investment is secure.
- Fixed Yield: You know exactly how much you’ll earn over the term of the CD.
- No Market Risk: Since CDs aren’t tied to the stock market, they’re unaffected by market volatility.
- FDIC Insurance: The government protects your money in case a bank fails.
One of the great things about CDs is the ability to ladder them. You can invest in CDs with different term lengths (such as 6 months, 1 year, or 2 years), giving you flexibility and easy access to cash as needed. However, the downside is the low yields. Current CD rates are far from the high-interest rates of the past—back in the 1980s, you could easily find rates of 8%–12%. Today, we’re seeing much lower rates, and it’s unlikely we’ll return to those high numbers anytime soon.
MYGAs: The Annuity Alternative to a CD
Now let’s take a look at MYGAs—Multi-Year Guaranteed Annuities. MYGAs work similarly to CDs in that they offer guaranteed principal protection and a fixed rate of return over a set period. However, there are some key differences:
- Higher Yields: Currently, MYGAs tend to offer better interest rates than CDs.
- Tax Deferral: In non-IRA accounts, the interest earned on a MYGA grows tax-deferred until you withdraw it, which can help your money compound faster.
- Flexible Account Use: You can hold a MYGA in IRAs, Roth IRAs, or non-qualified accounts, providing flexibility in how you structure your retirement savings.
- Tax-Free Transfers: At the end of the term, you can transfer the value of your MYGA into another MYGA or into an income annuity without triggering taxes, thanks to a 1035 exchange.
Safety: MYGA or CD?
When it comes to safety, CDs have the edge because of FDIC insurance, which guarantees your deposit up to a certain amount, typically $250,000 per depositor per bank. On the other hand, MYGAs rely on the claims-paying ability of the issuing life insurance company. This means that the safety of your MYGA depends on the financial strength and stability of the insurance company behind it. Therefore, it’s crucial to work with a reputable insurance provider and a licensed agent who can help you evaluate their financial health.
Both options fall under the P of my P.I.L.L. framework, which stands for Principal Protection. Whether you choose a CD or MYGA, both are solid choices for protecting your principal.
The Tax Advantage of MYGAs
One of the biggest differences between CDs and MYGAs is how they’re taxed. Here’s a breakdown:
- CDs (non-IRA): If you hold a CD outside of an IRA, you must pay taxes on the interest earned every year, even if you don’t withdraw it.
- MYGAs (non-IRA): The interest on a MYGA grows tax-deferred, meaning you don’t pay taxes until you take the money out.
That tax deferral can be a significant benefit, especially if you’re looking to grow your savings without the annual tax burden that comes with CDs.
Using Both Together
It’s not necessarily a matter of choosing one over the other. Many people use a combination of both CDs and MYGAs as part of a balanced investment strategy:
- Short-Term CDs for liquidity and FDIC protection, providing easy access to cash when needed.
- Long-Term MYGAs for higher yields and tax deferral, offering better returns over a longer period.
This approach can give you the best of both worlds—security and flexibility, with the potential for growth.
Final Thoughts
Both MYGAs and CDs are safe, reliable options for people looking to protect their savings. The right choice for you depends on your specific needs—whether you prioritize safety and guaranteed returns (CDs) or higher yields and tax-deferred growth (MYGAs). A well-rounded strategy might involve using both in tandem to maximize your financial security and growth potential.
