A multi-year guaranteed annuity, or MYGA, is a fixed annuity that guarantees a fixed interest rate for a set length of time, often three to ten years. A MYGA is suited for someone approaching retirement who seeks tax deferral and investment return assurance.
Purchasing a MYGA is one approach for supplementing investment accounts and Social Security benefits in retirement. MYGAs are a possibly safer option to grow your money because you won’t have to pay taxes on the growth until you start receiving payments. They’re also known as CD-type annuities since they have some of the same features as certificates of deposit, such as a fixed interest rate and a time horizon for the investment.
How Do Multi Year Guaranteed Annuities Work?
A MYGA is a contract you enter into with an insurance company in which you pay a premium in exchange for a guaranteed fixed interest rate on your contribution for a set period of time. The period can be three, five, or ten years long, or any number in between.
A MYGA operates by tying up a large chunk of money in order to earn interest. You may have to pay surrender charges if you need to take money from an annuity before the accumulating term is over. Your contract may feature penalty-free withdrawal terms, which allow you to make partial withdrawals before the surrender period ends without paying fines, depending on the annuity provider.
You can either receive the premium and interest gained at the end of the accumulation period, or you can renew the contract. If you decide to renew the contract, the interest rate may alter from what you agreed to when you first signed it. Transferring the assets to a different sort of annuity is another option. Using a 1035 exchange, you can do so without incurring a tax penalty. Because insurance firms that sell annuities set interest rates, it’s critical to conduct your homework before accepting a contract.
The first step is to talk to a financial counselor about how much you want to put into an annuity. Then it’s time to do some comparison shopping: check out the MYGA rates offered by a number of top regarded insurance firms.
MYGA Interest Rates
MYGA rates differ slightly from one carrier to the next and alter on a daily basis. The best rate for a MYGA with a 10-year surrender period was 3% in late September 2020, while the best rate for a MYGA with a seven-year surrender period was 2.9 percent. For MYGAs with five-year and three-year surrender periods, the best rates were 3.2 percent and 2.1 percent, respectively.
MYGA rates are typically higher than CD rates, and they compound annually. Higher rates may be found in a contract with more restrictive withdrawal provisions.
Provisions for Withdrawal
Surrender charges apply to MYGAs, which means annuity holders may be required to pay fees if they want to withdraw money from their annuity before the term is finished. Many annuity providers feature penalty-free withdrawal clauses, which allow you to take money out of an annuity before the surrender period finishes without incurring fines. For example, some contracts enable you to withdraw up to 10% of your investment in the first year.
The terms of each contract determine the withdrawal provisions for MYGAs. However, you can usually withdraw a fixed amount of money during the term without incurring any penalties. The annuity contract specifies all the details. Your contract may also allow you to withdraw funds in the event of an emergency. You might be allowed to take money out of your MYGA to cover a hospital bill, for example. This may be preferable to taking out a 401(k) loan or taking money from an IRA. However, before withdrawing funds from a MYGA, keep in mind that one of the key advantages of a MYGA is that it grows tax-deferred.
A MYGA allows you to avoid paying taxes on interest that is compounded annually. Because the tax is only applied when the money is taken out, this can exponentially increase wealth. It’s similar to putting money into an IRA or 401(k), but without the restrictions.
Depending on the type of funds you use to purchase the annuity, the tax requirements differ widely. According to CNN Money, if you buy a MYGA with eligible funds, such as an IRA or other tax-advantaged account, you pay income tax on the principal and interest when you take money out. You only pay taxes on the interest if you buy a MYGA with nonqualified funds. MYGAs aren’t the only ones who profit from this tax break. Traditional fixed annuities have this feature.
Is A MYGA The Right Choice For You?
Prior to purchasing a MYGA, as with other financial instruments, you should determine your financial objectives. MYGAs may be more acceptable for consumers nearing retirement or who want not to be exposed to market volatility due to their conservative character. While a MYGA may be appropriate for a risk-averse investor, it may not be appropriate for a younger investor seeking development.
A MYGA may not be the ideal financial approach for people trying to outperform inflation. Other forms of annuities may make more sense for your financial goals if you are seeking for a solution to replace your income when you retire. Furthermore, while other types of annuities offer a better potential for payout, they also have a higher risk. In the end, you must consider what is most crucial for your financial goals. Request a consultation or contact us online today to determine if a MYGA is the right choice for you.