CD vs 5-Year MYGA: Which Leaves You With More After 5 Years?
Two safe-money vehicles, two tax treatments. One quietly compounds; the other hands you a 1099 every year. Let’s make the trade-offs obvious in minutes.
Quick Verdict
| Dimension | 5-Year Bank CD | 5-Year MYGA |
|---|---|---|
| Rate Type | Fixed, set at purchase | Fixed, guaranteed for full term |
| Taxation of Growth | Taxed annually (1099-INT) | Tax-deferred until withdrawal |
| Early Access Treatment | Bank penalty: forfeited months of interest | Surrender charges; possible MVA; often 10% penalty-free annually |
| Backing / Safety | FDIC (per depositor/category limits) | Insurer financial strength; state guaranty association (varies) |
| Compounding Drag | After-tax reinvestment only | Gross compounding (no annual tax haircut) |
| 1035 Exchange Option | No | Yes (tax-deferred reposition) |
| Minimums | Low ($500–$1K) | Moderate ($10K–$20K typical) |
| Renewal Behavior | May auto-renew at lower rate | Owner decides: renew, 1035, partial shift, start income |
| Ideal Use Case | Short-term goal + annual interest use | Mid-term accumulation with deferral advantage |
1. After-Tax Accumulation
A CD credits interest you owe tax on each year—even if you leave it in. A MYGA compounds untouched until you trigger taxation. In a 24% bracket, a 4.75% CD behaves closer to reinvesting 3.61% net; a 4.50% MYGA can surpass the final value despite the nominal rate gap.
2. Liquidity Reality
CD penalties are simple but rigid. MYGAs often allow a 10% annual penalty-free withdrawal plus planned laddering. If your earliest real need is at or after year five, “being locked up” is usually more perceived than actual.
3. Reinvestment & Renewal Risk
Missing a CD’s renewal window can trap funds at a lower yield. At MYGA maturity you can 1035 exchange (no current tax) into new terms, index strategies, or income riders.
4. Tax Timing Control
CD = forced annual recognition. MYGA = choose timing (withdrawals, partial exchanges, phased income) to align with lower-income years or retirement timeline.
5. Psychological Safety vs Functional Outcome
FDIC branding feels familiar. Insurer guarantees + state coverage tiers are structurally different yet historically robust. Weigh emotional comfort against net after-tax accumulation.
See Which Leaves You With More Net
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