What’s the Difference Between a MYGA and a Fixed Annuity?

While multi-year guarantee annuities (MYGAs) and fixed annuities share similar attributes, there are important differences between these types of annuities. All MYGAs are fixed annuities, but not all fixed annuities are MYGAs!

Annuities are often a great product to add to your retirement portfolio. They are the only financial vehicle that can help guarantee you monthly income for life. The most conservative and safe type of annuity is the fixed variety.

With fixed annuities, an insurance company guarantees a rate of return on your principal payment over a specific period of time. This period defines the difference between a “standard” fixed annuity and multi-year guaranteed annuities, or MYGAs.

Fixed Annuities Come in Different Flavors

A fixed annuity is a type of annuity contract where you place money (the premium) with an insurance company, and the company pays you a specific, guaranteed interest rate on the money. This rate is guaranteed for a specific period of time chosen by you. With a deferred fixed annuity, you get tax-deferred growth before retirement. This is known as the accumulation period.

The money in the deferred annuity can then be paid out later as retirement income, providing a stream of income, usually in the form of monthly installments. This payout phase is also called annuitization.

Traditional Fixed Annuities

A traditional fixed annuity provides an interest rate that is guaranteed only one year at a time but offers an ongoing minimum guaranteed floor rate that offers principal protection and lasts for the duration of the surrender charge period. The actual rate offered changes each year of the surrender period, which usually lasts from one to ten years, or sometimes more.

The minimum interest rate on a fixed annuity can not be lower than the regulatory-prescribed minimum interest rate.

QLACs

Another type of deferred fixed annuity pays you monthly income at a future date you specify. This type is called a Qualified Longevity Annuity Contract, or QLAC. A QLAC is a specific retirement strategy where some of the IRS required minimum distributions (RMDs) are deferred until a certain age. The maximum is 85.

Usually, these are required to be withdrawn by law. You choose a future date after which you will receive withdrawals. At that time, the insurer offers a fixed monthly amount based on their internal investment strategy and takes on the market and interest rate risk. A couple of QLAC rules:

• You can spend 25% or $145,000 (whichever is less) of your retirement savings account or IRA to fund a QLAC.
• The main benefit of a QLAC is a deferral of taxes that would normally be due on RMDs, and the future guaranteed payments can be a nice supplement to social security payments.

MYGAs

Multi-year guarantee annuities, or MYGAs, have become a go-to choice for people who want a guarantee of investment return for several years, not just one. MYGAs are purchased before retirement and can be one of the most conservative investments in your pre-retirement portfolio.

Growth is steady and guaranteed, and MYGAs usually offer interest rate returns many times higher than certificates of deposit (CDs) and mutual fund accounts offered by banks. Insurance companies usually offer guaranteed periods of three, five, or seven years, along with surrender periods that either match the guarantee period or extend further up to 10 years.

What Makes a MYGA Different?

A MYGA is essentially a fixed rate annuity because the rate you sign up for is guaranteed for the time period you choose.

MYGAs are unique vs. year-to-year traditional fixed annuities.

Interest rates: MYGAs almost always feature higher interest rates than traditional fixed products.

Locked-in rates: MYGAs guarantee that higher rate for many years, typically your choice of three, five, or seven year terms.

Better access to your money: While both MYGAs and fixed annuities have surrender penalties for early withdrawals, MYGAs typically give you more access to your money each year. Canvas Annuity, for instance, allows access to 10% of the balance without penalty.

Who Should Buy a MYGA?

As the name implies, multi-year guaranteed annuities are for people comfortable with exchanging access to money for superior, guaranteed interest rate returns. While it is true that there are penalties for early withdrawal, the rates vs. traditional one year, guaranteed, fixed annuities are significantly better

Since annuities are long-term retirement savings products, you should only allocate money to a MYGA that you will not need for the duration of the surrender charge period. If you believe you may need access sooner, then a traditional one year fixed annuity or bank CD may be a better choice.

Takeaways

As mentioned, annuities are the only financial vehicle that can help guarantee that you will have monthly income for life. These products allow you to grow money before retirement, then guarantee monthly payments for life or for a period of time you select.

When growing money during the accumulation phase, MYGAs offer better rates than traditional one year fixed annuities. Check out the current competitive rates today at Canvas Annuity.