Still settling for 3% on a bank CD?

Some people are still holding 3% on a bank CD in the belief that it is the safest place for their money. Meanwhile others are earning north of 5% with their principal just as protected.

The difference is a MYGA: a multi-year guaranteed annuity, issued by an insurance company. It behaves much like a CD.

Here are actual rates. One carrier offers three, five, seven and ten-year terms at 5.5%, 5.85% and 5.8% respectively. Against a bank CD paying somewhere between 3.5% and 3.8%, that is close to a two-point gap. Rates outside California are often better still, with some over 6%.

Another carrier structures it differently. On a six-year contract it pays 9.7% in the first year, then 4.7% for years two through six. The first year effectively carries a bonus.

A recent case makes it concrete. A client placed $500,000 into that six-year contract. The 9.7% first year credited $48,500 in interest. Year two therefore began at $548,500, with 4.7% applied to that larger figure. Compounding forward, the balance passes $690,000 after six years. Those rates are contractual and do not move partway through.

There are two structural differences. The first is the higher rate. The second is compounding: bank CDs are renewed at each maturity and often calculated simply, whereas with a MYGA the credited interest is added to the principal, so the following year earns on the larger total.

The term matters too. Bank CDs typically mature in about a year, so in a falling-rate environment every maturity means re-locking at a lower rate. A MYGA fixes the rate for the whole term, which means holding today’s rate for longer.

Two things to check before moving anything. MYGAs carry surrender charges, and a withdrawal before age 59½ can trigger a federal early-withdrawal penalty. This is money that is committed for the term.

So the first question is what this money is for. If you need it soon, a CD is the right tool. If it is money you want to grow safely over several years, a MYGA deserves a look. Once the purpose is settled, the choice is usually clear.

The rates and product terms in this post were current when it was written. They vary by carrier and by state and can change without notice. I will confirm what is available today when we speak.