1-Year MYGA vs 1-Year CD — Why the MYGA Gives You §1035 Flexibility

Side-by-side: 1-year MYGA vs 1-year CD

Twelve dimensions. Read this before anything else on the page.

Top 1-year CD headline rates sometimes nominally beat 1-year MYGAs. The §1035 advantage shows up when you compare after-tax compounding over multiple rollovers — the realistic use case for retirement savers parking $100K-$500K of safe money.

What is a §1035 exchange?

IRC §1035(a)(3) permits a tax-free exchange of one annuity contract for another annuity contract. The exchange does not trigger income tax, even if the old contract has accumulated gain. Proceeds wire carrier-to-carrier. Cost basis transfers dollar-for-dollar. The old carrier issues Form 1099-R coded "6" (Section 1035 exchange) — informational only, no tax liability.

The full §1035 menu (in order of common use):

• Annuity → annuity — IRC §1035(a)(3). The case this page is about.
• Life insurance → annuity — IRC §1035(a)(1). Useful when an old whole-life policy is no longer needed.
• Life insurance → life insurance — same code section, common in 1035 upgrades.
• Life or annuity → qualified LTC — added by the Pension Protection Act of 2006.
• Annuity → life insurance is NOT permitted. One-way restriction; the IRS won't let you convert deferred ordinary income (annuity gain) into the more favorable tax treatment inside a life policy.

The §1031 analogy (for real estate-savvy readers)

If you've ever sold an investment property and rolled the proceeds into another property to defer capital gains, you used IRC §1031 — the like-kind exchange rule for real property. §1035 is the same conceptual maneuver applied to insurance contracts: swap one asset of the same class for another, defer the embedded gain, keep the cost basis. Different code section, different asset class, same idea. You cannot cite §1031 for an annuity move or §1035 for a real estate move — don't mix them on a return.

How this benefits 1-year MYGA holders

At the end of year one your 1-year MYGA matures. You now have four real choices, three of which a CD holder doesn't get:

1. Surrender for cash. The carrier sends a check. The gain is taxable in the year received. This is the only option a CD holder has at maturity.
2. §1035 exchange into another 1-year MYGA at a better-paying carrier. Tax-free. You shop the market and the basis follows you.
3. §1035 exchange into a multi-year MYGA (3-, 5-, 7-, 10-year) if rates dropped and you want to lock long. Tax-free.
4. §1035 exchange into an FIA, DIA, or SPIA if your goals shifted toward principal-protected upside, deferred income, or immediate income. Tax-free.

Worked example — the math

Scenario A — 1-year MYGA holder: deposit $250,000 at 4.75%. End-of-year value $261,875, gain $11,875. At maturity: §1035 tax-free into a 5-year MYGA at 5.50%. Cost basis stays $250,000; account value transfers at $261,875. Tax owed: $0. Full $261,875 keeps compounding.

Scenario B — 1-year CD holder, same numbers: deposit $250,000 at 4.75%. End-of-year value $261,875, gain $11,875. At maturity: cash out. The $11,875 hits Schedule B. At 24% federal bracket: $2,850 owed (CA resident at 9.3%: add ~$1,104 state, total tax drag ~$3,954). Redeposit $259,025 after federal tax. You just gave up $2,850 of compounding capital — every year, forever.

One rollover, the gap is small. Compound it over a decade and the MYGA holder gets a structural lead of 50-200 bps of effective net return. Bigger balance, higher bracket — wider gap.

§1035 mechanics — step by step

This is what actually happens when you do one. Read this once and you'll know more about §1035 than 80% of advisors selling MYGAs.

1. Apply at the new carrier first. The application includes a §1035 transfer request packet — a 2-3 page form naming the old carrier, old policy number, and transfer amount.
2. New carrier sends the §1035 request to the old carrier. Often with a Medallion Signature Guarantee or notarized owner signature.
3. Old carrier processes the request. Liquidates the contract, calculates any surrender charge or MVA, prepares a check or wire payable to the new carrier, FBO your name. The check must NOT be made out to you.
4. Funds arrive at the new carrier. End-to-end timeline: 30 to 90 days. Wires faster than checks; bigger carriers process faster than small ones.
5. New contract issued. Cost basis recorded at the same number the old carrier reported.
6. Old carrier files Form 1099-R with code "6". Informational; no tax owed.

At no point may you take possession of the funds. The IRS calls this constructive receipt, and the moment a check made payable to you personally hits your mailbox the exchange is broken and the gain becomes taxable. If you ever see a check made out to you for "§1035 proceeds," call the carrier and refuse it.

Common §1035 mistakes that trigger tax

Same handful of errors show up over and over.

• Cashing out and redepositing. Not a §1035 — it's a surrender plus a new purchase. Fully taxable.
• Check made out to YOU. Constructive receipt. Even if you endorse it over within hours, the IRS treats it as a distribution.
• Exchanging into a non-annuity product. MYGA → brokerage = NOT §1035. MYGA → mutual fund = NOT §1035. MYGA → CD = NOT §1035. Receiving product must be an annuity or qualifying insurance contract.
• Cross-owner exchanges. Husband's annuity → wife's annuity = NOT §1035. Same owner required. (Spousal continuation at death is a separate mechanism.)
• Cross-character exchanges. Non-qualified annuity → qualified (IRA) annuity = NOT §1035. Tax character must match.
• Annuity → life insurance. One-way restriction — life can roll to annuity, but not the reverse.
• Annuitant changes. Carriers typically require the same annuitant on both sides. Some allow reasonable changes; ask first.

Multi-year §1035 strategy — the 1-year MYGA ladder

The hidden power of a 1-year MYGA isn't year one. It's the multi-decade compounding effect of being able to roll tax-free every year you want a better carrier or a different structure.

Worked comparison — $500K, 10 years, 24% federal bracket

Assume both products average 4.75% gross per year. You reshop annually because that's the point of a 1-year instrument.

CD ladder (taxable each rollover)

• Effective net rate after 24% federal tax: 4.75% × (1 − 0.24) = 3.61% net
• $500,000 compounded at 3.61% for 10 years = ~$713,400

MYGA ladder via annual §1035 exchanges (tax-deferred)

• Compounds at the full 4.75% gross — no tax paid until final withdrawal
• $500,000 at 4.75% for 10 years = ~$795,800
• If you withdraw it all in year 10 at 24%, after-tax: ~$795,800 − ($295,800 × 0.24) = ~$724,800 — still ~$11,400 ahead of CD
• If you keep deferring (don't lump-sum withdraw, spread across lower-bracket years) the gap widens to $50K-$80K+ over the decade

The gap exists because every year of CD interest siphons compound capital out permanently. The MYGA holder keeps the full pre-tax amount working every year. §1035 is what makes that sustainable across multiple carriers and rate cycles.

When a 1-year CD still beats a 1-year MYGA

I sell MYGAs. I also tell people when a CD is the right call. Here are the four cases where a 1-year CD is genuinely the better instrument:

• You need the money at maturity, no plans to roll. If you're parking cash for a known expense in 12-14 months (down payment, kid's wedding, tax bill), the CD is simpler. The §1035 advantage is irrelevant when you're taking the cash either way.
• Sub-$25,000 balances. Most MYGA carriers have $10K-$25K minimums. Some require $50K+. A CD will take a $1,000 deposit at most online banks. Below the MYGA threshold, the comparison doesn't even start.
• Pre-age 59½ holders. Annuity gains withdrawn before age 59½ trigger a 10% IRS penalty on the gain portion, on top of ordinary income tax. CDs only have the bank's early withdrawal penalty (no federal age-based penalty). For someone under 59½ who isn't 100% sure they'll hold to retirement, the CD is mechanically simpler. (Note: §1035 itself does NOT trigger the 10% penalty — but a subsequent withdrawal from the new annuity pre-59½ does.)
• You want absolute liquidity. CD early-withdrawal penalty is 3-12 months of interest — predictable and bounded. MYGA surrender = MVA (market value adjustment, which can be positive or negative depending on rate environment) plus a surrender charge that's typically 5-9% in year 1, declining over 5-10 years. If you may need to break the contract early, the CD has a more predictable exit cost.

How to find 1-year MYGAs (they're rare)

Most of the MYGA market lives at 3-10 year terms. The 1-year MYGA is a niche product because the carrier earns less spread on a short-dated contract, so they offer fewer of them. As of June 2026 here are the carriers that consistently offer 1-year MYGA terms:

Always verify current rates against AnnuityRateWatch or the carrier's posted rate sheet — MYGA rates move monthly. AM Best ratings above are current as of mid-2026.

The trade-off: 1-year MYGAs pay lower headline rates than longer terms — typically ~4.50-4.75% on 1-year vs ~5.25-5.50% on 5-year at the same carrier. You're paying ~75 bps of yield in exchange for short duration plus the option to §1035 into something else in 12 months.

Whether the yield give-up is worth it depends entirely on your view of where rates go. If you expect rates to rise, the 1-year MYGA + §1035 lets you upgrade. If you expect rates to fall, lock the 5-year now.

Goldstein's Take

If the choice is genuinely between a 1-year MYGA and a 1-year CD for money you intend to keep working in the safe-money sleeve for years, the MYGA wins on flexibility — and the §1035 exchange is the reason. The CD forces a taxable event every 12 months. The MYGA lets you defer tax indefinitely while still resetting the rate annually and shopping across carriers. Over a decade with a 24% federal bracket and a $250K-$500K balance, that's $20K-$80K of compound capital you keep instead of mailing to Treasury one year at a time. For under-59½ holders, for sub-$25K balances, and for money earmarked for a specific upcoming expense, the CD wins on simplicity. For everything else — particularly retirement-age savers parking large balances — the 1-year MYGA's §1035 optionality is structurally superior. Most agents won't show you a 1-year MYGA because they're not on most agent shortlists. Ask anyway.

If you're shopping this comparison, also read

• CD vs MYGA — Full Comparison — the parent article covering all term lengths and rate scenarios
• Best 1-Year CD Rates 2026 — current top-of-market 1-year CD rates for direct comparison
• Best MYGA Rates 2026 — top 3, 5, 7, and 10-year MYGA rates across the carrier shelf
• MYGA vs CD — After-Tax Math — deep dive on bracket-by-bracket comparison
• CD Ladder vs MYGA Ladder — the multi-rung version of this strategy
• California Residents — CD vs MYGA After-Tax — state-tax-aware comparison for CA holders
• Is a MYGA Safer Than a CD? — guaranty fund vs FDIC comparison
• When to Move from HYSA to MYGA — sizing the move, threshold balance
• Goldstein Complexity Index — how to score any annuity contract for plain-English understanding

Frequently Asked Questions

Want me to find the best 1-year MYGA + map the §1035 path for your next move?

15-minute call — no pressure.

I'll pull current 1-year MYGA rates across the A-rated shelf, compare them to the best 1-year CDs you're seeing, and write out the §1035 exchange path for what happens at maturity — including the specific carriers I'd shop at year 2 if rates move. Independent, no carrier owns me.

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Disclosure

This article reflects publicly available product materials and approximate rates as of the date stated above. Annuity rates, CD rates, MYGA crediting, and surrender schedules change frequently — typically monthly. Always confirm current values against the most recent carrier disclosure document and the actual contract before purchasing. This article is general information for educational purposes; it is not a personalized recommendation, solicitation, or offer of any specific product, nor is it tax or legal advice. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers across the annuity and long-term care insurance market; the producer's specific appointment status with the carriers mentioned in this article may vary, and this article is not an endorsement or representation of carrier appointment. No compensation has been received from any carrier in connection with the publication of this article. Always read the actual contract and consult a licensed advisor and a qualified tax professional before purchasing any annuity or executing a §1035 exchange. AM Best ratings, IRS rules under IRC §1035 and §1031, and tax treatment generally are subject to change. Tax discussion of IRC §1035, IRC §1031, Rev. Proc. 2011-38, the Pension Protection Act of 2006, and the 10% pre-59½ penalty reflects law as of 2026 and is subject to change.