CDs vs Annuities

CDs and annuities are often compared because both can provide principal protection and a guaranteed interest rate.

But not every annuity belongs in that comparison.

The annuity product most directly comparable to a CD is a Multi-Year Guarantee Annuity, or MYGA.

Both offer a fixed contractual rate for a specified period.

The differences are in who issues them, how they are protected, how they are taxed, and how the rates are priced.

Key Takeaways

• CDs and MYGAs both provide principal protection and a guaranteed interest rate.
• CDs are bank products, while MYGAs are insurance contracts issued by life insurance companies.
• CDs generally receive FDIC insurance within applicable limits.
• MYGAs are subject to state insurance guaranty association protections and applicable limits.
• Non-qualified MYGA interest can grow tax-deferred inside the contract.
• CD interest in taxable accounts is generally taxable as it is earned.
• MYGA rates and CD rates can react differently to broader interest rates.

Which Annuity Is Most Like a CD?

The closest annuity comparison to a CD is a MYGA.

A Multi-Year Guarantee Annuity provides:

• principal protection
• a guaranteed interest rate
• a specific contract term

MYGA terms can range from short durations to longer periods.

That makes the product relatively easy to compare with CDs.

Fixed Index Annuities Are Not the Same Comparison

Fixed Index Annuities were designed to compete with CD-type returns.

But the future indexed return is not guaranteed.

That makes them fundamentally different from CDs and MYGAs when the goal is a known contractual interest rate.

If you want to compare guaranteed rate with guaranteed rate, use CDs and MYGAs.

Who Issues CDs?

CDs are generally issued by:

• banks
• credit unions
• brokerage platforms offering bank CDs

The bank agrees to pay a specified interest rate for a defined period.

Who Issues MYGAs?

MYGAs are issued by life insurance companies.

The life insurance company contractually guarantees the rate for the selected term.

That is why a MYGA is an insurance contract rather than a bank deposit.

How CDs Are Protected

Bank CDs can receive FDIC insurance when issued through an FDIC-insured bank and held within applicable limits.

That federal insurance is one of the primary attractions of CDs.

Credit unions may have separate federal insurance through the applicable credit union system.

How MYGAs Are Protected

MYGAs are not FDIC insured.

They are backed by the issuing life insurance company's claims-paying ability.

State guaranty associations may provide additional protection subject to state-specific limits and rules.

Those protections differ from FDIC insurance.

Compare the Carrier

Because a MYGA is issued by a life insurance company, the financial strength of the carrier matters.

Ratings can help provide context when comparing insurers.

The highest MYGA rate does not automatically mean you should ignore the financial strength of the company offering it.

Which Has Better Rates?

There is no permanent answer.

CDs may be more competitive at certain shorter durations.

MYGAs can become more competitive at longer terms.

The actual comparison should be based on current rates rather than general assumptions.

Why MYGA Rates Do Not Always Follow the Fed

CD rates tend to be closely connected to prevailing banking and interest-rate conditions.

MYGA pricing can behave differently.

Life insurance companies have multiple areas influencing profitability, including:

• life insurance
• lifetime income products
• investment portfolios
• mortality risk pools
• current interest rates

That gives insurers more variables when setting MYGA rates.

A MYGA Carrier May Be Raising Money

Sometimes a life insurance company offers a particularly competitive MYGA rate because it wants to attract a certain amount of premium.

Once the company reaches that internal target, the rate can change.

That can happen regardless of the next Federal Reserve move.

Can You Withdraw Interest?

Many CDs allow interest withdrawals depending on the structure.

Many MYGAs do as well.

Some MYGA contracts may also allow:

• interest withdrawals
• a percentage of the account value to be withdrawn penalty-free
• other liquidity provisions

Those terms vary by carrier.

What Happens If You Withdraw Early?

Both CDs and MYGAs can have penalties for accessing money earlier than the contract allows.

With a MYGA, this can involve surrender charges.

Review the surrender schedule before purchasing.

You should not commit money that you expect to need during the contract term.

CDs and MYGAs Can Be Used in Retirement Accounts

Both products can potentially be held within different account structures.

That can include:

• traditional IRAs
• Roth IRAs
• non-qualified accounts

The tax treatment depends on the account type.

The Tax-Deferral Difference

One major difference appears when non-qualified money is used.

With a MYGA, interest generally grows and compounds tax-deferred while it remains inside the contract.

You generally do not owe tax on that interest until it is withdrawn.

With a CD held in a taxable account, interest is generally taxable as it is credited or earned under applicable tax rules.

Why Tax Deferral Can Matter

Tax deferral allows the full MYGA interest balance to continue compounding inside the contract before taxes are paid.

That does not mean the interest becomes tax-free.

When taxable gains are withdrawn, they are generally subject to ordinary income tax treatment.

The benefit is the timing of the taxation.

Can You Ladder CDs and MYGAs?

Yes.

You do not necessarily have to choose one product or one maturity date.

You can potentially create a ladder using different terms.

For example, money could be spread across:

• three-year terms
• five-year terms
• seven-year terms
• ten-year terms

That can create staggered maturity dates.

MYGAs as "Annuity Bonds"

A MYGA can be thought of as purchasing a contractual guarantee from a life insurance company for a specified period.

The basic idea is straightforward:

You commit the money for the chosen term.

The insurance company guarantees the rate.

Is a MYGA Better Than a CD?

Not automatically.

And a CD is not automatically better than a MYGA.

They solve a very similar principal-protection problem with different structures.

The appropriate choice depends on:

• rate
• duration
• liquidity
• tax treatment
• insurance protection
• carrier or bank strength

Compare Guaranteed Rates With Guaranteed Rates

Do not compare a guaranteed CD rate with a hypothetical Fixed Index Annuity projection.

That is not an apples-to-apples comparison.

Compare CDs with MYGAs when the goal is principal protection and guaranteed interest.

Where to Compare MYGA Rates

Use our annuity calculators to compare current MYGA rates by state and contract term.

Then compare those guarantees with current CD options and decide which structure best fits your time horizon, tax situation, and liquidity needs.

The Bottom Line

CDs and MYGAs are both designed to provide principal protection and a guaranteed interest rate for a specified period.

CDs are bank products with applicable federal deposit insurance protections.

MYGAs are insurance contracts backed by the issuing life insurance company, with state guaranty association protections subject to applicable rules and limits.

The biggest differences include taxation, rate-setting, liquidity, and the institution backing the guarantee.

Compare the actual contractual rates and terms before deciding which one fits your savings or retirement strategy.

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