Bank CDs and Insurance MYGAs
With interest rates this high, you may be considering investing in a bank CD. Is there a better option? Maybe.
The insurance industry offers a similar investment product that goes by the awkward name of a Multi-Year Guaranteed Annuity (MYGA). Besides not rolling off the tongue, it also suffers from having the word “annuity” in its name which conjures up both ambiguity (there are many kinds of annuities) and wariness (they often come with high and hidden fees).
What is a MYGA and why might it be better for someone who is considering parking her money for a few years?
Essentially, it’s the insurance industry’s version of a bank CD. You hand over your money to an insurance company for a specified term (usually 3 years or more) and they return your money, plus the interest at the end of the term, or roll it over into a new MYGA (more on that in a moment).
As is typical with a CD, if you need your investment before the MYGA term is up, you’ll pay a penalty to get your money earlier. It is sold on a “net” basis (that is, you get the full rate of return that is specified) so you don’t need to worry about any hidden fees.
There are some important differences between a bank CD and a MYGA:
- CDs have FDIC insurance; MYGAs do not. The insurance industry is regulated by states and most states have a guaranty pool that insures against insurance company failures but the protection is not as strong as the federal imprimatur of the FDIC.
- MYGAs offer higher rates. This compensates for their higher risk (see #1).
- MYGAs offer better tax treatment. With a CD, you pay tax on the interest each year of the CD term, even if you receive the interest at the end. With a MYGA, you defer the interest income until the end of term and if you rollover the MYGA to a new one, you can continue to defer the income. You’ll pay the tax eventually but just not now. This may be advantageous if, for example, your income is substantially higher now than you expect it to be in 3 years or you simply want to shift taxable income to a later year for whatever reason.
- A MYGA purchase involves more hassle than a CD. A MYGA is an insurance product so you need to work with an insurance agent, fill out an application, and deal with an insurance company’s website that likely has a less refined user experience. Banks make it easier to purchase and manage a CD, especially if you’re already a customer. However, CDs are still not hassle-free.
If you’re looking to lock up money for a safe investment for, say three to five years, consider a MYGA instead of a CD. It’s a bit riskier and has some set-up work but you’ll earn more money on the investment and push a bit of tax into the future.