If you’ve been comparing safe places to park your savings, you’ve probably run into two similar-sounding options: the traditional fixed annuity and the MYGA, short for Multi-Year Guaranteed Annuity. They look almost identical on the surface, but a few key differences can meaningfully change how much money you actually end up with. In this post, we’ll walk through exactly how each one works, side by side.
What Is a Fixed Annuity?
A traditional fixed annuity works a lot like a bank CD. You hand a lump sum to an insurance company, and in exchange, they pay you a guaranteed interest rate for a set period of time. Your money isn’t invested in the stock market, so there’s no risk of losing your principal to a market downturn.
Because it’s issued by an insurance company rather than a bank, a fixed annuity offers a couple of perks a CD doesn’t. Your growth is tax-deferred, meaning you don’t pay taxes on the interest each year the way you would with a taxable CD. Most fixed annuities also let you access a portion of your money each year penalty-free, something a CD typically doesn’t allow at all.
Fixed annuities also aren’t tied to any single bank’s balance sheet. Your guarantee comes from the insurance company itself, backed further by state guaranty associations, which is part of why checking the company’s financial strength rating matters before signing a contract of any real size.
How Tax Deferral Actually Adds Up
Tax deferral sounds like a small perk, but it makes a real difference over time. With a taxable CD, you owe income tax on the interest every single year, even if you never touch the money. With a fixed annuity, that tax bill is postponed until you actually withdraw funds.
| Taxable CD | Tax-Deferred Fixed Annuity | |
|---|---|---|
| Interest earned each year | Taxed immediately | Not taxed until withdrawn |
| Amount left to compound | Reduced by yearly tax bill | Full interest keeps compounding |
Because none of your annual interest gets pulled out to pay taxes along the way, every dollar of growth stays invested and keeps earning more growth on top of itself. Over a 5 or 10-year contract, that difference can add up to a noticeably larger ending balance compared to an identical rate on a taxable account, even before you factor in what you’ll eventually owe when you withdraw.
What Is a MYGA?
A MYGA, or Multi-Year Guaranteed Annuity, is really a specific type of fixed annuity. It works the same basic way, safe, tax-deferred growth backed by an insurance company, but with one important twist: the interest rate is locked in and guaranteed for the entire length of the contract, not just the first year.
That single difference in how long the rate is guaranteed is the main thing that separates a MYGA from a traditional fixed annuity, and it changes which one makes more sense depending on where you think interest rates are headed.
Fixed Annuity vs. MYGA: Side-by-Side Comparison
Before choosing between the two, there are five things worth comparing on any contract you’re considering.
| What to Compare | Traditional Fixed Annuity | MYGA |
|---|---|---|
| Insurance company rating | Should be A-rated or better | Should be A-rated or better |
| Contract length | Typically 5-10 years | Typically 2-10 years |
| Free withdrawal amount | 0-15% per year, varies by product | 0-15% per year, varies by product |
| Upfront bonus | Sometimes offered | Sometimes offered |
| Rate guarantee length | Usually just year one | The entire contract term |
The insurance company’s rating matters because it reflects their financial strength, and how likely they are to actually deliver on the guarantees they’ve promised you. Ratings typically range from A to D, with modifiers like a plus or minus sign, and the higher the letter, the stronger the company.
The Bonus: Free Money Up Front
Some contracts, whether fixed annuities or MYGAs, offer an upfront bonus as an incentive to sign the contract. This bonus gets added directly to your starting balance before any interest even begins.
| Your Deposit | Bonus | Starting Contract Value |
|---|---|---|
| $100,000 | 2% | $102,000 |
In this example, a $100,000 deposit with a 2% bonus starts earning interest from a $102,000 base instead of $100,000. That extra $2,000 then compounds along with the rest of your money for the life of the contract, which can add up to a meaningful amount by the end of a long contract term.
Current Rate vs. Base Rate: Watch for the Teaser Rate
Many of these products advertise a “current rate,” which is often a higher rate paid only in the first year, similar to a bank offering a promotional rate to open a new savings account. After that first year, the contract typically drops down to a lower “base rate” for the remaining years.
Here’s where the MYGA and the traditional fixed annuity really part ways. On a five-year MYGA, the insurance company might guarantee that attractive current rate for four of the five years, with only the final year at the base rate. On a traditional fixed annuity, you’d typically only get that current rate locked in for the first year, and everything after that depends on wherever interest rates happen to move.
Which One Should You Choose?
The right choice really comes down to your best guess about where interest rates are headed. If you believe rates are likely to rise, a traditional fixed annuity gives you the flexibility to potentially earn a better rate after that first guaranteed year ends, since you’re not locked into today’s rate for the whole term.
If you value certainty, or you think rates might fall in the coming years, a MYGA lets you lock in today’s rate for the entire contract term. That peace of mind, knowing exactly what you’ll earn every year without surprises, is the whole appeal of choosing a MYGA over a standard fixed annuity.
Think about how this played out for savers in recent years. Someone who locked into a MYGA when rates were higher kept collecting that same guaranteed rate every year afterward, even as rates on new contracts declined. Meanwhile, someone in a traditional fixed annuity whose one-year guarantee expired during that same stretch may have seen their renewal rate drop along with the broader market.
There’s no universally “right” answer here. It genuinely depends on your own outlook for interest rates, how long you’re comfortable committing your money, and how much you personally value certainty over flexibility.
How Surrender Charges Shrink Over Time
The surrender charge on a fixed annuity or MYGA isn’t a flat penalty forever. It’s built to shrink a little each year until it disappears completely at the end of the contract term, encouraging you to leave the money in place until the term is done.
| Year | Typical Surrender Charge |
|---|---|
| Year 1 | 7% |
| Year 3 | 5% |
| Year 5 | 3% |
| Year 7 and beyond | 0% |
These exact percentages vary quite a bit from one contract to the next, so always check your own schedule rather than assuming it matches this example. The key idea to remember is simple: the longer you hold the contract, the smaller the penalty becomes, until it eventually reaches zero.
Three Things to Watch Out For
Both types of contracts are genuinely safe places to keep money, but there are three tradeoffs worth understanding clearly before you sign anything.
- Surrender charges. If you need more money than your annual free withdrawal amount allows, you’ll owe a penalty to access it. Only commit money you’re confident you won’t need beyond that limit.
- Inflation. A 3% guaranteed rate sounds solid, but if inflation runs at 2% that same year, your real purchasing power only grew by about 1%. Safe investments like these don’t automatically account for rising prices.
- Taxes on pre-tax money. If you fund the contract with pre-tax retirement dollars, you’ll owe income tax on withdrawals later, including any required minimum distributions the IRS eventually requires. That tax bill lowers your actual take-home return compared to the rate printed on the contract.
None of these three points mean a fixed annuity or MYGA is a bad choice. They just mean the headline interest rate isn’t the whole story, and it’s worth running your specific numbers before committing a large sum. If you’d like help comparing your options, you can schedule a free personal planning session and we’ll walk through the details together.
Frequently Asked Questions
Is a MYGA the same thing as a CD?
They’re similar in that both offer a guaranteed rate on a safe, principal-protected deposit. The main differences are that a MYGA is issued by an insurance company rather than a bank, grows tax-deferred instead of being taxed yearly, and typically allows some penalty-free withdrawals that a CD usually doesn’t.
Can I lose money in a fixed annuity or MYGA?
Your principal is protected from market losses in both types of contracts. The main way you could come out behind is by withdrawing more than your free withdrawal amount and triggering a surrender charge, or by not accounting for inflation and taxes when comparing your real return.
How do I check an insurance company’s rating?
Independent agencies publish financial strength ratings for insurance companies, generally on a scale from A to D with plus or minus modifiers. Your financial professional can pull this rating for any company you’re considering, and it’s worth checking before committing a large deposit.
What happens at the end of the contract term?
Once your guarantee period ends, most people either withdraw their funds penalty-free or roll the balance into a new contract to keep the tax-deferred growth going. It’s a good idea to review your options a few months before the term ends so you’re not stuck with an unfavorable renewal rate.
Can I move money between different fixed annuities or MYGAs without a tax hit?
In many cases, yes. A provision in the tax code allows you to transfer funds directly from one annuity contract to another without triggering taxes, as long as it’s done as a direct exchange rather than cashing out first. This is a common way people move to a new contract with a better rate once their current guarantee period ends.
P.S. If you’re trying to decide between a fixed annuity, a MYGA, or another safe savings option, you don’t have to figure it out alone. It’s free to join. Over 150 members are already in it, plus you’ll get free courses and resources to help you plan your retirement with confidence.
