What is a multi-year guaranteed annuity (MYGA)??

A multi-year guaranteed annuity (MYGA) provides a predetermined and contractually guaranteed interest rate for a specified period of time. An MYGA is just one way to build an additional retirement savings account that supplements Social Security benefits or tax-advantaged investment accounts. Here's how these annuities work and the benefits they can offer.

Multi-Year Guaranteed Annuities, Explained

A Multiyear Guaranteed Annuity is a type of fixed annuity. As the name implies, fixed annuities offer a fixed interest rate. The main difference between MYGAs and traditional fixed annuities is the duration for which this interest rate is guaranteed.

With a traditional fixed annuity, the guarantee may only apply for part of the contracted term. For example, you can take out an annuity contract for 10 years, but your interest rate is only guaranteed for the first five years.

An MYGA, on the other hand, guarantees your interest rate for the entire term of the contract, usually between one and 10 years.

MYGAs vs. CDs

Multi-year guaranteed annuities are often mentioned in the same breath as certificates of deposit because they are similar in nature.

With a CD, you must hold your money for a specific period of time. Once the CD reaches maturity, you have the option to renew it (at the current interest rate) or withdraw your original deposit along with the interest earned.

You can also renew an MYGA at the end of your contract. In this case, the interest rate may differ from the one you originally opted for. As with CDs, you will be offered the current interest rate at the time of renewal, which may be higher or lower than the one you previously received.

If you choose not to renew your MYGA with a new contract, you can withdraw the principal and interest instead. Your annuity company may give you a penalty-free window to do so, during which you do not have to pay surrender charges or other costs. Within that period, you can also transfer the money into a new, higher-interest annuity as part of a 1035 exchange without incurring a tax penalty.

That said, there are some key differences between MYGAs and CDs:

• An 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 not.
• An MYGA can allow partial withdrawals per year without a tax penalty. CDs usually have an early withdrawal penalty if the money is withdrawn before it matures.
• An MYGA can offer more competitive interest rates than a CD.
• Compared to CDs, annuities typically incur more fees and growth is tax deferred, whereas with a CD, you pay annual taxes on the interest.

Advantages of a MYGA

There are several reasons why you might prefer a multi-year guaranteed annuity over another type of annuity.

Because an MYGA offers a guaranteed interest rate for the entire term of the contract, it is considered a less risky investment than a variable or indexed annuity. Variable and indexed annuity returns are tied to the performance of the stock market; while the potential for return is higher, the risk is also higher.

The interest earned on an MYGA is tax-deferred, which means you don't have to pay taxes on the growth until you start paying it off. It is possible to purchase an MYGA with qualified or non-qualified funds. With a qualified retirement plan purchased through an IRA or other tax-deferred account, you pay income taxes on principal and interest when you make withdrawals. In the case of non-qualified pensions, only the interest is taxable.

The ability to make partial withdrawals each year without penalty provides flexibility. If you z. B. Need money for a large medical bill, you can withdraw it from your MYGA, which might be a better option than taking money out of an IRA or a 401(k) loan. Even with a regular CD, you must expect prepayment penalties, which will cause you to lose some of the interest earned.

A MYGA has fees associated with it, but these can be lower compared to other types of annuities. With all annuities, the rule of thumb is that the less complicated they are, the less you pay in fees.

What you should know before buying a MYGA

If you're considering a multi-year guaranteed annuity as part of your retirement income plan, here are some things to consider.

First, consider your age. These types of annuities may be more suitable for people nearing retirement than for younger savers. If you're still several decades away from retirement, you may get better returns by investing in your company's 401(k) plan or an IRA.

Next consideration: What should an annuity do for you? An MYGA may not be the right choice if you are looking for an annuity product that will provide you with consistent income for retirement.

Finally, consider the potential return on investment. MYGAs are inherently designed for rather conservative returns. That could make it harder for them to keep up with rising inflation. If you're interested in annuities and want to accept a higher level of risk for the chance to grow your investment more, a different type of annuity may be a better fit.

The bottom line

Multi-year guaranteed annuities can be used to replace CDs in your financial plan, or you can invest in them alongside a CD. They offer a potentially safer way to invest for the future while enjoying favorable tax treatment once you withdraw the money.

Tips for retirement planning

• When comparing annuities, pay attention to the fees and rating of the insurance company selling them. Some annuities may have expensive hidden fees that reduce your return. It's also important to work with a reputable insurance company. This reduces the risk of the insurer going bankrupt and not being able to pay you once you can withdraw the annuity.
• An annuity is just one tool to help you plan for retirement. You may have additional investments in a 401(k) or IRA, and Social Security benefits may also factor into your overall financial picture. SmartAsset's retirement guide can help you make sure you're on the right track to retire comfortably.
• Consider talking to a financial advisor about whether an annuity is right for you. Your advisor can explain the basics of how annuities work and show you how to achieve your financial goals. If you do not have an advisor, it must not be difficult to find one. SmartAsset's free tool matches you with financial advisors in your area within 5 minutes. If you are ready to be matched with local counsel to help you achieve your financial goals, get started now.