Bank CDs and Insurance MYGAs

You may have considered investing in a bank CD (certificate of deposit) but have been dismayed by the paltry rates on offer. As of this writing, the highest 3-year bank CD rates are in the range of 0.65% and that’s just with a few online banks; if you go to the traditional brick and mortar banks, 3-year CD rates are closer to 0.10%.

Is there a better option? Yes. 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 so many kinds of annuities) and wariness (they often come with high and hidden fees).

What is a MYGA and why might it be a better option for someone who is considering parking her money for a few years?

Essentially, a MYGA is 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 specified interest at the end of the term, or roll it over into a new MYGA (more on that in a moment). As is typically the case with a CD, if you need your investment before the MYGA term is up, you’ll need to pay a penalty to get your money earlier by forgoing some of the interest you had accrued. 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 an insurance company MYGA:

  1. CDs are backed by FDIC insurance; MYGAs are 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 quite as strong as the federal imprimatur of the FDIC.
  2. MYGAs offer higher rates. Currently, 3-year MYGAs are in the range of 1.5% to 2+% — much higher than CDs. You can view this as partially compensating you for their higher risk (because they lack an FDIC guarantee) but banks are notoriously stingy with the interest they pay.
  3. 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 recognizing the interest income until the end of term and if you rollover the MYGA to a new term, you can continue to defer the income. Yes, 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.
  4. Purchasing a MYGA involves a bit 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 has a less refined online user experience. Banks make it easy to purchase and manage a CD, especially if you’re already a customer.

If you’re looking to lock up money for a safe investment of at least three 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.

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