For retirement account options, annuities have grown in popularity; particularly multi-year guaranteed annuities (MYGAs), which are a type of fixed annuity. These accounts can be used to grow wealth and lead to steady income in retirement, but they work differently from other types of fixed annuities.
Many in the pre-retiree phase become overwhelmed with choices as they try to create financial security for their retirements. To help demystify these important decisions, this article goes over the various characteristics these types of annuities, including their strengths and weaknesses, to help those prepping for retirement to balance risk and reward in their financial plans moving forward.
What Is a Fixed Annuity?
A fixed annuity is a contract with an insurance company stating that the company will pay interest during an initial guarantee period (often one year but sometimes multiple years). Then, the insurance company will declare renewal rates annually, subject to a minimum, unless the buyer annuitizes the account. This interest accrues tax-deferred, which means the buyer will not pay taxes on their account until they withdraw from the account after retirement.
Traditional fixed annuities should not be confused with the payout structure of a fixed index annuity, which ties the fund’s growth to the performance of a market index. Traditional fixed annuities and MYGAs both accumulate funds for a defined period by a defined rate, while fixed index annuities fluctuate.
What Is a Multi-Year Guaranteed Annuity?
A multi-year guaranteed annuity (MYGA) is a type of fixed annuity that sets the interest rate on the account for the term of the contract. As with other fixed annuities, this contract is established with an insurance company. However, one major difference is that with MYGAs, buyers pay a premium, which is the insurance company’s incentive to provide fixed interest regardless of market conditions.
Once the term of the contract has ended (usually 3-9 years), the buyer has several options:
- Renew the MYGA with new terms and interest rates.
- Withdraw the cash without incurring penalties in either a lump sum or multiple partial withdrawals, provided the contract has gone past its predetermined period.
- Annuitize the account to receive guaranteed payouts from the insurance company for a timeframe up to the rest of the buyer’s life.
- Move the growing balance to a traditional financial account.
Although this flexibility is appealing to many pre-retirees, it is particularly favored by those whose retirement plans change as they get closer to retirement age.
Advantages & Challenges Of MYGAs vs Fixed Annuities
While MYGAs are a type of fixed annuity, they are not identical to traditional fixed annuities. They provide advantages and challenges that should be considered before opening either account.
Fixed vs. Variable Interest Rates
MYGAs offer a fixed interest rate over the account period, compared to traditional fixed annuities, which are set for the first contract year and can then change annually. This means that MYGA accounts can lose opportunity cost if rates rise after locking in the account, due to the fixed nature of the interest.
Required Premiums To Open
A standard MYGA contract requires one premium in full to be paid upfront to open the account. Comparatively, traditional fixed annuities can be funded with multiple premiums, which could reduce the upfront risk. A MYGA can have a multi-premium option, but this is less common.
Withdrawal Fees
These may be penalty-free with a MYGA or fixed annuity up to a certain percentage of the account’s value within a predetermined period, called the surrender charge period. In either case, withdrawals before the buyer reaches the age of 59 ½ will receive a federal tax penalty equal to 10% of the taxable portion of those withdrawals.
Taxes
Both MYGAs and traditional annuities offer tax-deferred growth, which means the buyer only pays taxes on their account when they withdraw funds as income.
Performance-Based Payouts
Both traditional fixed annuities and MYGAs have guaranteed payout rates that do not decrease due to market performance, unlike fixed index annuities, which are tied to the performance of an index.
Term Options
A MYGA and traditional fixed annuity have different term options. While MYGAs have term options at set intervals, usually under 10 years, traditional fixed annuities continue growing at the terms set by the agreement for the lifetime of the contract, with an interest rate that can change annually.
Reach Out To Matador Insurance To Choose The Right Annuity For Your Situation
A MYGA is a fixed annuity, which like a traditional fixed annuity, offers a chance to grow retirement income based on predetermined rates and terms. Unlike other fixed annuities, these account contracts only last a few years, giving buyers a chance to see if they work in their situation compared to other options.
At Matador Insurance, our goal is to help pre-retirees open accounts that work toward securing their financial futures, with clearly communicated plans for their specific situation. Contact our team today to learn about the advantages, disadvantages, and terms of different kinds of annuities.