Annuity vs CD — Side-by-Side Comparison

A multi-year guaranteed annuity (MYGA) and a bank certificate of deposit (CD) are the two most common “lock in a fixed rate for a fixed term” vehicles for retirees. They look similar on the surface: a known yield, a defined term, a penalty for early withdrawal. The structural differences across yield, tax treatment, insurance backing, and what happens at maturity are material.

The fast comparison

Yield

MYGA rates are typically 0.5% to 1.5% above bank CD rates of the same term. The premium reflects two things: life insurance carriers invest in longer-duration corporate bonds with higher yields than bank reserves, and carriers compete in a different distribution channel (insurance agents) than banks (retail branches and online).

For a 5-year horizon, a competitive MYGA may pay 5.50% while a competitive CD pays 4.50% to 5.00%. The 0.5% to 1.0% spread compounds over the term. On a $100,000 premium over 5 years, a 0.75% spread is approximately $4,000 of additional value.

Tax treatment

The bigger difference for most retirees is tax treatment.

A CD pays interest each year, and the interest is reported on a Form 1099-INT. It is taxed in the year earned, at ordinary income tax rates. This applies whether the consumer withdraws the interest or rolls it back into the CD.

A MYGA defers tax. Interest credited inside the contract is not taxable until withdrawn. For a consumer in a 22% federal tax bracket, deferring 5 years of interest defers approximately 22% of each year’s interest from current tax. The deferred amount continues to compound inside the contract.

When the MYGA is eventually withdrawn (or annuitized), the gain is taxed as ordinary income. The tax is paid later, often when the retiree is in a lower tax bracket. The combination of higher pre-tax yield + tax deferral typically produces meaningfully higher after-tax outcomes than a CD over the same term.

Insurance backing

The CD wins on simplicity here.

A CD is FDIC-insured up to $250,000 per depositor per bank. Coverage is federal, automatic, and well-understood. Spread $750,000 across three banks and the full amount is covered.

A MYGA is covered by the state guaranty association of the state where the policy is issued. Coverage limits vary by state, typically between $100,000 and $500,000. The coverage is real and has paid out in actual carrier insolvencies historically, but it is state-level rather than federal, and the limits are less standardized.

For a consumer placing $100,000 with a single A+ rated carrier, the difference is largely theoretical. For larger placements ($500,000+), splitting across multiple carriers below each state’s coverage limit is the standard practice.

Early withdrawal

A CD early withdrawal typically forfeits a defined number of months of interest. For a 5-year CD with a 12-month interest forfeit penalty, withdrawing in year 2 means losing 12 months of interest plus pulling the principal early. The principal itself is preserved.

A MYGA early withdrawal triggers a surrender charge (declining each year, typically 9% in year 1 to 0% at term end) plus a market value adjustment (MVA) that increases or decreases the surrender value based on the change in reference interest rates since issue. Most MYGAs allow a 10% free withdrawal each year beginning in year 2.

For consumers who reliably will not touch the principal during the term, the MYGA’s surrender structure is rarely binding. For consumers who may need liquidity, a CD with its known penalty is more predictable.

Maturity behavior

This is where MYGAs have an underappreciated flexibility.

At CD maturity, the consumer takes the money or rolls into a new CD at the bank’s current renewal rate. There are no other options.

At MYGA maturity, the consumer has four options:

1. Take the full value (with normal tax on the deferred gain)
2. Renew into a new term at the current rate
3. Convert to a lifetime income stream (annuitization or income rider activation)
4. Do a 1035 exchange to another annuity tax-free (preserving the deferral)

The fourth option is particularly valuable. A consumer who has accumulated $300,000 inside a MYGA can roll it tax-free to a SPIA, a DIA, or another MYGA at a different carrier, without triggering tax on the gain. This allows mid-retirement strategy adjustment without a tax cost.

When CD wins

• Short horizon (under 2 years)
• Need for federal-level insurance certainty (FDIC vs state guaranty)
• Low or zero tax bracket (where tax deferral provides no benefit)
• Need for predictable liquidity at known cost

When MYGA wins

• Medium horizon (3 to 10 years)
• 12% federal tax bracket or higher (deferral starts to matter)
• Capital intended for retirement use (1035 exchange optionality)
• Willingness to lock up principal in exchange for higher yield

How most retirees use both

The vehicles complement each other. A practical retirement allocation might be:

• $50,000 in a 1-year CD for emergency liquidity
• $100,000 in a 3-year MYGA for medium-term income
• $200,000 in a 7-year MYGA for late-retirement income or eventual annuitization

The CD provides the short-term cushion. The MYGAs provide the higher-yielding, tax-deferred, more strategically flexible core.

For carrier-specific MYGA details, see the MYGA pillar page and the carrier directory.