Amid economic uncertainty, retirement savers are turning to financial products that can help bring stability to their portfolios.
Multi-year guaranteed annuities (MYGAs) offer guaranteed annuity rates over a fixed period. A MYGA protects long-term savers against stock market volatility and provides tax-deferred growth and a steady retirement income stream, instead of a lump sum.
Read on to learn what a MYGA annuity is, how it differs from other annuities, and how you can benefit by locking in MYGA rates, which often beat what you’ll get in other financial products.
With a MYGA annuity, you decide how much to deposit, and you receive a fixed interest rate over the lifetime of your contract. Terms typically range between three and 10 years. Over the life of your MYGA, interest payments grow on a tax-deferred, compounding basis.
At the end of your contract, you can renew your annuity at a new rate or choose from several distribution options, which include taking periodic payments or a lump sum. For most annuities, you’ll pay taxes on the earnings portion of your withdrawals.
This annuity style differs from other common annuity types like variable and immediate contracts. Variable annuities function more like traditional investment accounts. With a variable annuity, you choose from non-guaranteed investment options — usually stock mutual funds — which means you take on more risk, given that market performance dictates your returns.
Immediate annuities require an upfront premium payment that delivers income right away. Within 30 days to one year from your deposit, your insurance company turns your money into monthly, quarterly, annual, or lifetime payments. Unlike a MYGA, there’s no accumulation phase, just immediate income.
Individuals choose MYGAs because they don’t want to deal with market ups and downs and don't anticipate withdrawing money immediately. They want to see it grow and then tap it as a source of income in retirement.
To choose the right annuity, assess your situation and future needs against the pros of a MYGA.
MYGAs provide peace of mind. When you deposit funds in a MYGA, you know — with certainty — that this fixed annuity won’t lose money. You know your interest rate upfront and for how long you’ll receive it. Your principal deposit and earnings turn into income at the end of your contract.
You receive a fixed interest rate that grows tax-deferred during your annuity term. As you earn interest, it gets tacked onto your initial premium payment, so you consistently earn additional interest on this new, higher amount.
Some available options tweak the MYGA model to provide flexibility for individuals who might need to access some of their cash before retirement. These options don’t grow tax-deferred, but you can withdraw up to 10% of your account value annually without paying fees, charges, or IRS tax penalties. In exchange for this flexibility, you agree to pay taxes annually on your earnings.
Because in most cases you fund a MYGA with after-tax dollars, you only pay taxes on the earnings that accrue. This is called a non-qualified annuity, distinct from a qualified one, where you fund the account with pre-tax money (like an IRA or 401(k)) and pay taxes on your entire withdrawal, principal, and earnings.
While you often hear comparisons between certificates of deposit (CDs) and MYGAs, it’s essential to understand the flexibility offered by a MYGA. Unlike CDs, you can take a partial withdrawal — typically up the annual 10% threshold — and not pay a penalty.
MYGAs are extremely straightforward, so they tend to incur fewer management-related expenses than other annuities. And the simplicity of a fixed interest rate, not tied to a market-linked index or fund performance, makes MYGAs one of the least expensive (and most understandable) options for annuity shoppers.
When you deposit your money with a bank, investment firm, or insurance company, they typically roll it into stocks, attempting to earn more than the rate they’re paying you. This is called a spread. So, if they pay you 5% interest, they must do better than that in their investments to stay profitable.
The fixed interest rate and preset term of a MYGA give insurers stability and flexibility in their financial planning choices, and augment their stream of income. MYGAs can offer more competitive rates over a longer timeframe, with fewer fees. MYGA rates are 0.5–1.5% higher than what you’ll get in a CD.
While CDs are insured (usually by the FDIC), your insurance company backs your annuity. However, banks who insure cash through the FDIC face tighter banking-related restrictions around how they can invest their money.
If you’re worried about losing money in a volatile market or are close to (or in) retirement, a MYGA is an enticing option — you can invest knowing that your money is safe. You set a time horizon that works for you and avoid dealing with market flux and withdrawal-related restrictions. In retirement, you can set up a payout schedule to withdraw money on a timeline that provides a stream of income to supplement Social Security and your other investments.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
