Treasuries vs. CDS - How about a MYGA instead? by Scott Stolz, CFP, RICP (week 52)

 

Charles Schwab recently published an article entitled “CD or Treasury?  5 Factors to Consider” (CD or Treasury? 5 Factors to Consider | Charles Schwab).  I’ve never owned either in my life, and I probably never will, but I was still curious to read about how they positioned these two safe money alternatives against each other.  The article contained the chart below comparing yields on both options at various maturities.

 Given the similar yields, I was not surprised that the article focused mostly on the differences in liquidity and taxes.  Since treasuries can be more easily bought and sold and are also exempt from state income taxes, Schwab gave a slight advantage to them over CDs.  In the end, their advice was to build a ladder of various maturities no matter which option you chose.  The article also correctly advised investors to hold “…a CD or Treasury to maturity.” 

While I have no issues with the analysis outlined in the article, I couldn’t help but think that for someone that fully expects to hold the investment to maturity, a third choice was missing.  What about a Multi-Year Guaranteed Annuity (MYGA)?  Like Treasuries and CDs, they guarantee a rate for multiple years and provide 100% downside protection if you hold the annuity until the end of the rate guarantee period.  And while they can’t be sold on the open market like CDs and Treasuries, they do provide the extra benefit of no taxation until the annuity is cashed in and the accumulated interest is received. 

But how do the yields compare?  I regenerated the above chart adding in the highest available MYGA rates from insurance companies on the Schwab platform for the comparable maturities (MYGAs do not come in maturities of less than 2 years).

As you can see, at the longer maturities, MYGAs have a pretty considerable rate advantage.  And since I only looked at MYGAs available through Schwab, I couldn’t help but wonder why Schwab didn’t think to include them in the analysis.  For someone that has at least a 3 or 5-year holding period, the rate advantage combined with the benefits of tax deferral has to be attractive.  Even if the goal is to receive and spend the income each year, investors that are at least 59 ½ years old might want to consider a MYGA.  Yes, that will make the returns on the annuity taxable each year, but that simply puts the annuity on the same tax footing as both Treasuries and CDs.  If I’m going to pay taxes each year on what I earn, wouldn’t I prefer the alternative that pays me the most interest?

Some Considerations

Had Schwab included MYGAs in the analysis, they most surely would have added a few caveats.  First, the reason I listed the option of receiving the interest on the annuity each year only for those 59 ½ is because interest income from an annuity received prior to that age carries an additional 10% tax.  Like an IRA or 401K, the federal tax code allows annuities to be tax deferred to encourage people to save for retirement.  Thus, the code penalizes you for making early withdrawals.  Second, Treasuries are guaranteed by the federal government.  CDs carry FDIC insurance up to $250,000 per bank per investor.  Therefore, they too are essentially guaranteed by the federal government.  MYGAs are only guaranteed by the issuing insurance company.  While that gives them a high degree of safety, I certainly couldn’t say the guarantee is as strong as the other two options.

But Shouldn’t MYGAs at Least be Part of the Discussion?

All three options come in multiple maturities and are designed to provide a decent rate of return while providing 100% downside protection should you hold them to maturity.  All three options can be either sold or cashed in should a change in circumstances require you to raise funds.  In my mind, the main question therefore is does the annuity pay enough additional interest to compensate for giving up a guarantee offered by the federal government?  Perhaps I should call the annuity desk at Schwab and ask them what they think?