Multi-Year Guarantee Annuities: Is a MYGA Right for You?

Guaranteed competitive interest rates for your money now and guaranteed income for life at a future date? Seems like a fantasy, right?

But multi-year guaranteed annuities (MYGAs) are just that, built for people who want guaranteed returns on money that they won’t need for a few years, and the promise of retirement income you can’t outlive. So if you have so-called “long-term money” that isn’t earning the returns you’d like, then a fixed rate MYGA may be the right choice.

Let’s take a more in-depth look at MYGAs and figure out if the product might be a good fit for you.

Defining Multi-Year Guaranteed Annuities (MYGA)

MYGAs are fixed annuity products issued by life insurance companies that help you build a solid foundation for your retirement plan. These products are usually offered in time periods called “terms” of three, five, or seven years. This is the amount of time that the rate offered by the company is guaranteed to be paid and is also known as the guarantee period.

Not surprisingly, since the insurer is guaranteeing the rate for a period of time, there are penalties for early withdrawals. These are called surrender charges. Some MYGAs renew for a new guarantee period at the end of the term and some just have new crediting rates declared on an annual basis. A MYGA is an excellent product for people who want to fill a conservative, long-term savings bucket for retirement in order to supplement Social Security benefits.

For comparison, there are other types of annuities that offer variable rates of return, namely fixed-indexed annuities and variable annuities. Fixed indexed annuities typically offer a low minimum guarantee rate with the potential for upside returns linked to an index such as the S&P 500. With returns tied to the stock market, variable annuities can be the most volatile but have the most upside potential.

MYGAs vs. CDs

Since MYGAs are conservative investments, some people compare them to bank certificates of deposit (CDs). A CD requires you to place your money with the bank for a specific period of time. CDs have “maturity dates” after which you can renew them at the interest rate available at that time or withdraw the balance.

Like bank CDs, most insurance companies will allow you to renew a MYGA at the end of your initial rate guarantee period or term. If you do, the interest rate may be higher or lower than the rate that was available when you first signed up.

If you choose not to renew your MYGA with a new contract, you could withdraw the balance. The insurance company usually allows a penalty-free window to do so, so you won’t pay any surrender charges or other fees during the window. You could also transfer the money into a new, higher-yielding annuity using what is called a 1035 exchange without triggering a tax penalty.

Here are are several key differences between MYGAs and CDs:

• A MYGA is a contract with an insurance company, while a CD is issued by a bank or broker.
• CDs sold by a bank are FDIC insured, while MYGAs are backed by the claims-paying ability of the issuing insurance company.
• Many MYGAs allow for partial penalty-free withdrawals of up to 10% each year without a surrender charge. CDs typically impose an early-withdrawal penalty for taking money out prior to maturity.
• A MYGA almost always offers a more competitive interest rate than a CD.
• Your annuity will grow tax-deferred. Income from a CD is taxed each year.
• CDs are typically seen as short-term investments, while annuities are purchased for the long term.
• You can take money out of a CD at any age. If you withdraw money from an annuity prior to age 59.5, you may owe an IRS penalty.

How MYGAs Work

Differing from something like a CD MYGAs are the simplest form of an annuity to understand and buy. Typically, you fund your MYGA with a single premium deposit and receive the fixed interest rate that is presented by the insurance company.

That interest rate is guaranteed to be paid for the term stated in your contract. Because MYGAs, like all annuities, are purchased as long-term investments, buyers should be aware of surrender charges that are present if they decide to make withdrawals prior to the end of the surrender charge period.

As we mentioned, though, some companies offer annual penalty-free withdrawal provisions that will allow you to withdraw a percentage of your account value without incurring a surrender charge.

Buying a MYGA

MYGAs can be purchased through life insurance agents, and directly online through companies like Canvas Annuity. Buying direct can be very convenient, and this method usually offers higher interest rates than buying through an agent. This is because commissions paid to agents can eat into the rate offered to the customer.

Due to the simple nature of the product and easy-to-understand features, it is easy to purchase a MYGA online. Other, more complex, types of annuities like variable or fixed-indexed annuities are best purchased with an agent or financial advisor.

What Happens When your MYGA Guarantee Period is Over

It is important to understand what happens to your contract when the initial rate guarantee period is over. The most common options are to withdraw your funds, roll into a new term with new surrender charges and guaranteed rate or annuitize your contract.

You may find that your contract automatically renews into a new rate guarantee period with new surrender charges if you do not select to withdraw your funds during a window of time. Usually, this window is 30 days and the insurance company will let you know in advance so you can determine what course of action is best for you.

Sometimes, the contract just continues on with no surrender charges and an annually declared rate. This rate may be higher or lower than your original guaranteed rate but will never be less than the minimum rate guaranteed on your contract. Finally, at the end of the rate guarantee period, you may be ready to annuitize your contract and reap the benefits of lifetime income. Your insurance company can help you understand what your monthly payments would be depending on your age and account value.

MYGAs and Taxes

One of the primary benefits of annuities is that taxes due on interest credited to the account are deferred until the owner begins to withdraw funds. This can create significant increases in wealth because the taxes are paid only when you need to take the money out (meaning you are earning interest on the money you would have paid each year in taxes).

The tax rules are slightly different depending on the type of funds you use to initially purchase the annuity. If you purchase a MYGA with qualified funds, like money sitting in an IRA, 401k, or another tax-advantaged account, you pay income tax on both the principal and interest (account value) when you take out money. If you purchase a MYGA with non-qualified funds, you have already paid taxes on the premium you deposit, so you only pay taxes on the interest when you make a withdrawal.

MYGAs and Death Benefits

When the contract owner or annuitant (usually the same person) dies, there will be taxes owed by the beneficiary(ies) on that annuity death benefit. Death benefit distributions and associated tax responsibilities can be complex. An insurance agent can help but specific tax questions should be addressed by a qualified tax professional.

If you are an annuity beneficiary or inherit an annuity, meet with your CPA or tax attorney to receive advice on any distribution decisions. The death benefit you receive will depend on the type of annuity you own.

Benefits of a MYGA

A MYGA has benefits that are similar to other types of annuities, namely:

• The ability to use them to create a stream of income payments as you near, or are in retirement. No other financial vehicle offers this guaranteed lifetime income benefit.
• Tax deferral. Unlike traditional savings products like CDs and savings accounts, MYGAs allow you to defer the payment of federal and state income taxes until you begin to withdraw money.
• Partial withdrawals. Many annuities allow penalty-free annual withdrawals of up to 10% of the value of the annuity.

Benefits unique to a MYGA:

• Conservative growth is driven by competitive fixed rates guaranteed by the insurance company.
• The ability to purchase online without an agent from a handful of insurance companies or agencies, including from Canvas Annuity.

What to Consider Before Buying a MYGA

Analyzing your retirement goals and taking into account your risk tolerance is critical before buying any financial product, including a MYGA. But given the conservative features of MYGAs, this product could be a solid foundation for people looking to accumulate guaranteed returns to supplement money from other riskier investments like stocks, bonds, and mutual funds.

While potentially suitable for a risk-averse investor, a MYGA may not be suitable for a younger investor interested in rapid growth. Also, for people who are looking for a financial instrument to outpace inflation, a MYGA by itself might not be the best financial strategy to meet that objective. Finally, all annuities have surrender charges and a specific surrender charge period and, therefore, are long-term financial vehicles. A combination of conservative and aggressive products is critical for a balanced retirement portfolio.

Is an MYGA Right for You?

If you are setting the foundation for a pre-retirement financial plan, a MYGA can play a pivotal role. The product offers a competitive, guaranteed fixed rate of return and, like all annuities, it can be used in retirement to provide a stream of guaranteed lifetime income. So if you would like these elements as part of a well-rounded retirement plan, a MYGA could be a great fit.

If you are looking for the most competitive MYGA annuity rates and a convenient, fast way to purchase the product, check out Canvas. The company offers some of the most competitive guaranteed rates in the country and you can complete the entire purchase online in minutes. And if you have any questions, there are non-commissioned agents available to answer questions along the way.