ComparisonLast updated: 2026-09-05Author: Hans Goldstein, NPN 20602398

Annuity vs CD: What Each One Actually Does With Your Money

If you are shopping CD rates you have already made the important decision: this money is not going into the market. The remaining question is which contract holds it. A multi-year guaranteed annuity — a MYGA — is the insurance industry's version of the same product, and on most days it pays more. It also behaves differently on tax, on liquidity and at death, and those differences matter more than the rate spread.

The four differences that decide it

	Bank CD	MYGA (fixed annuity)
Who stands behind it	FDIC, $250,000 per depositor per bank	The issuing carrier, plus your state guaranty association (commonly $250,000, varies)
Rate	Fixed for the term	Fixed for the term, typically higher
Tax while it grows	Interest taxed every year, even if untouched	Tax deferred until withdrawal
Getting out early	Interest penalty, usually a few months' interest	Surrender charge plus possible market value adjustment; most contracts allow 10% a year penalty-free
At death	Passes through the estate	Passes to the named beneficiary, outside probate
Before 59½	No age rule	Gains withdrawn early may carry a 10% IRS penalty

Why the tax line is bigger than the rate line

Put $250,000 in a 5-year CD at 4.25% in a 32% bracket. The interest is taxable every year as it is credited, whether or not you touch it, so you are compounding on the after-tax number the whole way.

The same $250,000 in a 5-year MYGA at 5.50% compounds on the full pre-tax balance and the tax bill does not arrive until you take money out. Two things are working at once: the higher rate, and five years of compounding on dollars that have not been taxed yet. That is why comparing headline rates alone understates the gap, and why the gap widens with your bracket and with the term.

This cuts the other way in a low bracket or inside an IRA, where the deferral adds nothing because the account is already tax-deferred. There the comparison really is just rate against rate.

Where the CD genuinely wins

You might need the money. Breaking a CD costs a few months of interest. Breaking a MYGA in year one can cost 8–9% of the balance. Liquidity is the real price of the higher rate.
You want federal insurance specifically. Guaranty associations are real and have paid, but they are state-level and slower than the FDIC.
You are under 59½. The 10% penalty on gains changes the math.
You want to ladder short. Under three years, CDs and Treasuries are usually the cleaner instrument.

Where the MYGA wins

The money has a job that is 3–7 years out. That is the sweet spot of the surrender schedule.
You are in a high bracket now and expect a lower one later. Deferral moves the interest into the lower-bracket year.
You are already at the FDIC limit at your bank. A second carrier is often simpler than a second bank.
You want the balance to reach a beneficiary directly. Naming a beneficiary keeps it out of probate.
You want the option of turning it into income later. A CD cannot become a lifetime payment; an annuity can.

What to check before you sign either one

On the MYGA: the surrender schedule year by year, whether there is a market value adjustment, the free-withdrawal allowance, whether the rate is guaranteed for the whole term or resets, and the carrier's rating. On the CD: whether it is callable, and whether the advertised rate requires a minimum balance or a linked account.

The single most common mistake is buying a term longer than the money's actual job. A 7-year MYGA on money you need in four years is a worse outcome than a 4-year CD, no matter what the rate sheet says.

FAQ

Is a MYGA better than a CD?

Neither is better in the abstract. A MYGA usually pays more and defers the tax; a CD is FDIC-insured and easier to break. If the money is earmarked for the next few years and you are in a high bracket, the MYGA usually nets more. If you may need it sooner or you want federal insurance specifically, the CD wins.

Are annuities FDIC insured?

No. Fixed annuities are backed by the issuing insurance company and, secondarily, by your state guaranty association, which covers a set amount per person per company (commonly $250,000, varying by state). CDs are backed by the FDIC at $250,000 per depositor per bank.

Do you pay taxes on a MYGA every year?

No. Interest inside a deferred annuity is not taxed until you take it out. A CD's interest is taxable in the year it is credited even if you leave it in the account. That difference is the main reason a MYGA and a CD at the same headline rate do not net the same.

Can you lose money in a fixed annuity?

Not from market movement — the rate is contractually fixed for the term. You can lose money by surrendering early, because surrender charges and any market value adjustment apply. Read the surrender schedule before you sign.