Multi-Year Guaranteed Annuities and Certificates of Deposit are two common options for people looking to protect principal while earning a fixed rate of return. They appear similar on the surface. Both offer a fixed interest rate for a defined period. Both are designed to preserve principal. Both are often considered conservative options.

The differences become clearer when you look at how earnings are taxed, who stands behind the guarantees, and what happens at the end of the guarantee period.

Where They Look Similar

  • Both pay a fixed interest rate for a defined period.
  • Both are designed to return principal according to their terms.
  • Both are commonly used by people seeking a more conservative approach than market-based investments.
  • Both may impose penalties or other restrictions for early withdrawals.

Where They Are Different

Taxes. CD interest is generally taxable in the year it is earned, even if it remains on deposit. MYGA earnings grow tax deferred until withdrawn. For non-qualified money, the difference in compounding may become more significant over longer holding periods, depending on the owner's tax situation.

Who stands behind the guarantee. CDs are insured by the FDIC up to applicable coverage limits. MYGAs are backed by the financial strength and claims paying ability of the issuing insurance company and, subject to state law, protections provided by state guaranty associations. They are different systems designed to protect consumers in different ways.

End of the guarantee period. When a CD matures, the depositor generally chooses whether to withdraw the funds or renew the CD. At the end of a MYGA guarantee period, contract owners may surrender the contract, make a partial surrender and renew the remaining balance for a new guarantee period, renew the entire contract at the then current guaranteed interest rate, or complete a 1035 exchange into another eligible annuity contract without triggering a current taxable event.

Rate environment. MYGA rates are established by insurance companies, while CD rates are established by banks. Depending on market conditions, either may offer the higher rate at a given point in time.

Factors to Consider

When comparing a CD and a MYGA, questions worth considering include:

  • How long can the money remain invested?
  • Is tax-deferred growth important?
  • Will the funds be needed before the end of the guarantee period?
  • How does the current MYGA rate compare with available CD rates?
  • What role will the money play within an overall financial plan?

The answers will differ from person to person and should be considered alongside individual financial, tax, and investment objectives.

The Bottom Line

Neither product is universally better. They are designed for different purposes. CDs and MYGAs both provide principal protection and fixed interest rates, but they differ in taxation, guarantees, flexibility at the end of the guarantee period, and other contract features.

Understanding those differences can help investors have a more informed conversation with their financial professional about which approach best aligns with their individual goals.

Where Wichita National Fits

Wichita National issues the Security MYGA with 3-, 5-, 7-, and 10-year guarantee periods.