You deposit a lump sum with an insurance carrier and select a term — typically 3, 5, 7, or 10 years. The carrier guarantees a fixed interest rate for the entire term. Interest compounds inside the annuity without generating a current-year tax event. At the end of the term you can withdraw all funds, renew at the current rate, or exchange into another annuity or retirement vehicle tax-free via a 1035 exchange.
Deposit lump sum
Choose your carrier, term, and deposit amount. The guaranteed rate is locked at the time of application.
Interest compounds tax-deferred
Your balance grows at the guaranteed rate every year. No annual tax bill — unlike a CD where you pay tax each year even if you don't withdraw.
Term ends — your options
Withdraw all funds (taxable on gains), renew at current rate, or 1035 exchange into another annuity product tax-free.
| Factor | Bank CD | MYGA Fixed Annuity |
|---|---|---|
| Guaranteed rate | ✓ Yes | ✓ Yes |
| FDIC insured | ✓ Up to $250K | State guaranty fund (varies by state, typically $100K–$500K) |
| Interest taxed annually | Yes — ordinary income each year | No — tax-deferred until withdrawal |
| Compounding tax drag | Yes — reduces effective return in higher brackets | None — full compounding on pre-tax balance |
| Early withdrawal | CD penalty (varies) | Surrender charge + 10% IRS penalty if under 59½ |
| Free withdrawal | Typically none without penalty | Typically 10% per year penalty-free |
| 1035 exchange | Not available | ✓ Tax-free exchange to another annuity |
| Beneficiary treatment | Passes through estate | Direct beneficiary designation — avoids probate |
Non-qualified MYGA (funded with after-tax dollars)
Interest growth is tax-deferred until withdrawal. When you withdraw, the LIFO (Last In, First Out) rule applies — gains are withdrawn first and taxed as ordinary income before you access your original tax-free principal. If you annuitize (convert to a stream of payments), the exclusion ratio applies — a portion of each payment is tax-free return of principal.
Qualified MYGA (funded with IRA or 401(k) dollars)
All withdrawals are 100% taxable as ordinary income — same as any IRA distribution. No exclusion ratio applies. RMDs must still be satisfied. A MYGA inside an IRA provides the same guaranteed rate and tax deferral, but because the IRA already provides tax deferral, the primary benefit is the guaranteed rate and principal protection rather than the additional tax deferral layer.
The real advantage — tax-deferred compounding in higher brackets
A 5% MYGA and a 5% CD have the same nominal rate — but in a 24% tax bracket, the CD's effective after-tax return is approximately 3.8%, because you pay tax on interest each year. The MYGA's after-tax return is closer to the full 5% because taxes are deferred until withdrawal — and you control when that happens. Ladder multiple MYGAs with staggered terms to create a predictable, tax-efficient rollover schedule.