Are you looking for a beneficial way to secure your future? MYGA might be the solution for you.
MYGA stands for Multi-Year Guaranteed Annuity. This is a type of annuity that offers a contractually guaranteed interest rate on your investment for a set period. Multi-Year Guaranteed Annuity (MYGA) facilitates safer and more favorable means to invest, offering protection against inflation and a great opportunity to diversify your retirement portfolio.
How MYGAs work, what are the main benefits and risks associated with this type of investment, and what sets them apart from CDs? All of this you will learn from our article.
How Do MYGAs Work?
The way buying MYGAs works is pretty straightforward. When you purchase an MYGA, you sign a contract with an insurance company, which obligates you to pay a lump sum premium for a guaranteed fixed interest rate on your investment for a set period.
MYGAs are, therefore, a type of fixed annuity. But there is a significant difference between a typical fixed annuity contract and MYGA. Traditional fixed annuities offer you an interest rate guarantee only for a portion of the length of your contract.
For example, if you’ve purchased an annuity contract for a 10-year term, you will get a guarantee for only five years. But MYGAs don’t work like that, offering you a guaranteed fixed interest rate for the whole duration of your contract (typically anywhere between 1 and 10 years).
It’s also worth mentioning that MYGAs are different from variable annuities. In the latter, the value of your contract will vary depending on the performance of an underlying portfolio of your sub-accounts. In practice, variable annuities are much closer to investment accounts, where the risks can vary, offering a chance to gain more from an investment but also lose more, as there are no guarantees on investment return.
It’s one of the reasons why some people prefer to invest via fixed annuities and MYGAs. For some, it’s a reliable strategy to diversify their retirement funds portfolio, creating savings that will secure them for the time they’re no longer professionally active.
MYGAs Rates
MYGAs rates change daily and vary between different insurance companies. They will also change depending on a contract’s terms. When looking for the most advantageous terms, it’s recommended to shop around and compare Multi-Year Guaranteed Annuity offers of various carriers.
As of May 2023, the best rate for a seven-year surrender period was set at 5.7%, whereas for a five-year surrender period, this rate amounts to 5.65%.
Benefits of MYGAs
What are the most substantial benefits of investing in MYGAs?
- Less risky – As MYGAs offer a rate guarantee for the whole contract term, they come with much safer terms for investors. For this reason, MYGAs are considered a safer alternative to some other popular options, like variable or indexed annuities.
- Interest earned is tax-deferred – When considering various investment opportunities, it’s always crucial to think about the tax implications. While many other forms of investing are taxable, with MYGAs, you won’t owe taxes on growth until the moment you start to receive the distributions. Additionally, you have the option to purchase an MYGA with qualified or non-qualified funds.
When you buy MYGAs with funds from a tax-advantaged account, like an IRA, you will need to pay income tax on the original sum committed and interest rate when making withdrawals. However, when it comes to non-qualified annuities, the tax is paid on only the interest. - Flexible withdrawals – Multi-Year Guaranteed Annuity, apart from offering a guaranteed interest rate, gives you the option to make flexible withdrawals without the risk of penalties. This is a considerable advantage of this solution, as life is often unpredictable, and you may need to access your savings to cover some medical bills or other significant expenses. You may have to pay withdrawal fees, and there are usually some limits placed on how much money can be withdrawn during the contract’s duration, though.
- Protection from inflation – One of the most important upsides of MYGAs is the fact that they offer you sufficient protection on your investment against inflation. As we can see in the last few years, this type of guarantee can greatly impact your savings, so those who are primarily interested in making safe investments can benefit greatly from purchasing an MYGA.
- Opportunity to grow your retirement income – MYGAs can be an excellent strategy to build up savings for a time you can’t or choose to no longer work. Next to the Social Security benefits and savings from your IRA annuity, MYGAs can help you live comfortably on your retirement, not worrying about the years ahead.
Drawbacks of MYGAs
There aren’t many serious disadvantages to investing in MYGAs; however, it might not be the best possible strategy to get considerable returns on investment. A lot depends on your goals and the amount of risks you are willing to take with your investments.
Some of the drawbacks of MYGAs include:
- Possible lower returns on investment – Compared to other available investing products, when purchasing an MYGA, you may expect lower ROI. Of course, with other products that are based on the performance of the stock market, these returns may be higher, but they may be much lower too. But for the guarantee that MYGAs bring you, these investment products may present a slightly lower potential for considerable returns than, for example, mutual funds or stocks.
- Withdrawal and surrender fees – As we mentioned earlier, there are some additional costs you may have to cover when you wish to withdraw money from your MYGA before the end of your contract’s term.But there are some instances when you might be able to withdraw your money without paying any additional fees. Some insurers offer what are called penalty-free withdrawals, allowing you to access a portion of your savings for free. If you want to get the exact information about potential fees, you should consult with an insurance company agent and check the terms of your contract. It’s recommended to ask about these costs prior to making a purchase. That way, you won’t get surprised by unexpected fees.
Who Should Consider a Multi-Year Guaranteed Annuity?
Anyone before the age of 85 can purchase an MYGA. But, in most cases, it’s people aged 60 and above who benefit the most from this product. As we presented above, MYGAs come with very favorable and safe terms, offering a way to diversify one’s retirement income.
As MYGAs are not exposed in the same way to market fluctuations as other investment products, they present an interesting alternative for people who want to increase their savings without bearing considerable risks.
MYGAs vs. CDs - Which Are Better?
CDs, by all means, serve a very similar purpose as MYGAs do. One of the main differences between these products is the fact that the first is offered by financial institutions, like banks and credit unions, whereas to buy a Multi-Year Guaranteed Annuity, you would have to go to an insurance company.
But that is not where the differences end. Multi-Year Guaranteed Annuities have a significant advantage over CDs; namely, the interest growth you gain from them can be tax-deferred. You only need to pay taxes from your investment and interest growth after withdrawing them. In contrast, with CDs, your earned interest is taxed every year.
It’s also worth mentioning that historically MYGAs interest rates were (and still are) higher than CDs’. Still, the differences between the two products in this regard are not significant.
And CDs offer less flexibility when it comes to making early withdrawals. In most situations, you won’t be able to withdraw your assets from a CD before its term without paying a penalty.
| MYGA | CD | |
|---|---|---|
|
Carrier
|
Insurance company
|
Bank or credit union |
|
Guaranteed interest rate
|
Yes |
Yes |
|
Guaranteed period |
Yes, and it usually ranges from 1 to 10 years |
Yes, and it usually lasts up to 5 years |
|
Withdrawals |
Allowed, with yearly limits and potential fees in place |
Normally not allowed without penalties |
|
Tax deferral
|
Yes |
No |
|
FDIC insured
|
No |
Yes |
|
Terms |
Anywhere from 2 to 20 years |
Usually ranging from 3 months to 7 years |
|
Liquid After Term
|
100% |
100% |
|
Annual Liquidity |
Up to 10% |
None |
|
Accepts IRA |
Yes |
No |
|
Accepts 401(k) |
Yes |
No |
Are MYGAs Safe?
Yes, amongst many different options, MYGAs offer one of the safest ways to invest money and get guaranteed returns. MYGAs often guarantee the premium, meaning you won’t lose the money you put into the purchase of an MYGA. And investing in these products comes with favorable tax implications, making them one of the most popular investments in the fixed annuities category.
This, however, does not mean MYGAs are entirely risk-free. Although they are not exposed as much to various market changes, they are also completely dependent on their careers. When CDs are insured by the Federal Deposit Insurance Corporation (FDIC), MYGAs don’t have the same level of protection.
In rare instances, when your insurer becomes insolvent, you may lose the money you put into your Multi-Year Guarantee Annuity. However, such situations are relatively uncommon. Additionally, MYGAs are protected at the state level by state guaranty associations to which your carrier belongs, which means you will get paid a claim in such an event (usually up to your state’s statutory limit).
So, overall, the risks associated with buying MYGAs are small in comparison to all the benefits you receive with this annuity.
Tips for Buying an MYGA
What are the best strategies when it comes to buying MYGAs?
- Compare different products from insurance companies – to find the one with the most favorable terms for you. It’s good to define your needs beforehand and go into this initial phase with a clear understanding of what you are looking for. If you’re unsure, consult a retirement financial advisor. At the Annuity Association, we provide comprehensive support for those who want to invest in annuities, offering our experience and knowledge of the market to help you find exactly what you need.
- Read the contract – When it comes to your finances, it’s always wise to make the most informed decisions you can possibly make, so going through your annuity contract with a magnifying glass is probably a good idea.
- Pay attention to fees – Early withdrawals of money may be burdened with surrender fees, and it’s good to be aware of these costs when signing an annuity contract.
- Mind the tax implications – Ensure that the product you’re buying comes with no tax penalty on the interest earned.
- Benefit from the “free look” period – In many states, it is possible to benefit from the trial period, during which you can decide whether to keep the annuity or cancel it without consequences. This period usually ranges from 10 to 30 days.
Final Thoughts
Multi-Year Guaranteed Annuities offer an advantageous way to diversify one’s retirement income portfolio. These annuities come with guaranteed fixed interest rates. They are tax-deferred, meaning you can safely invest your money into a product that will generate profit without facing substantial risks or tax implications.
MYGAs can offer you security and flexibility, so if you’re looking for a way to build your savings across a specified period, consider investing in MYGAs.
If you want to gain more information on the subject or benefit from our financial advisory services, contact us today. We can help you find the right annuity product for you.
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