A multi-year guaranteed annuity (MYGA) is an investment that guarantees the individual an annual return for a set number of years. This can be very beneficial because it offers stability and protection against inflation, which has steadily increased over the last few decades. For this guide, we will discuss what you need to know about choosing a multi-year guaranteed rate annuity, including:
What are the benefits? What kind of returns should I expect? Who qualifies for these investments? How do I choose between different types of annuities?
What Does MYGA Stand For?
MYGA stands for “Multi-Year Guaranteed Annuity.” An annuity contract provides guaranteed payments to the holder for a specified period, typically several years or longer. MYGAs are often used as a means of saving for retirement or as a way to generate a steady stream of income during retirement. They are issued by insurance companies and can be purchased either as a lump sum or through a series of payments. Multi-year guaranteed annuities are a form of a fixed annuity, which means that the payments are guaranteed, and the rate of return is fixed rather than tied to financial market performance.
What is a Multi-Year Guaranteed Annuity (MYGA)?
A MYGA, or multi-year guaranteed annuity, is a fixed annuity that offers a guaranteed fixed interest rate for certain periods, which usually last from two to 10 years. Multi-year guaranteed annuities are more appropriate for someone closer to retirement who prefers tax deferral and a guarantee on their investment return.
Buying an MYGA is one way to supplement investment accounts and Social Security payments in retirement by earning a guaranteed interest rate. In addition, you won’t owe taxes on the growth until you start taking payments.
They are also known as CD annuities since they provide some of the features of certificates of deposit, such as a specified term and a guaranteed fixed interest rate.
How Do MYGAs Work?
In a multi-year guaranteed annuity, you agree to pay an insurance company a premium for a guaranteed fixed interest rate on the contribution for a specific time. The term can be two, three, five, ten, or any number of years up to twenty.
You can either cash out the premium and interest earned or extend your contract after the accumulation period. If you renew your contract, the interest rate may differ from what you originally agreed to.
Another alternative is to move the money into a different type of annuity, like a fixed index annuity. A 1035 exchange allows you to do so without incurring a tax penalty.
Withdrawal Provisions
If you want to withdraw money from the annuity, you may have to pay fees called surrender charges. However, your contract might let you take some money out without paying yearly fees, called penalty-free withdrawals. Ask the insurance company about this when you get the annuity.
Your contract may also allow you to take money out for emergencies. For example, if you need money to enter a nursing home, you can take it out of your multi-year guaranteed annuity.
Before withdrawing funds from a multi-year guarantee annuity early, remember that one of the primary advantages of an MYGA is that they are tax-deferred. As a result, the money withdrawn won’t accumulate triple compounding interest over time.
Multi-Year Guaranteed Annuity (MYGA) Rates
MYGA rates vary slightly from carrier to carrier and change daily. For example, in September 2023, the best rate for a multi-year guaranteed annuity with a 5-year surrender period was 5.60 percent, and the best rate for an MYGA with a seven-year surrender period was 4.50 percent. The best rates were 5.65 percent and 5.70 percent for MYGAs with five-year and seven-year surrender periods, respectively.
MYGA rates are usually higher than CD rates and compound each year. Therefore, a contract with more limiting withdrawal provisions may have higher rates.
How Are MYGAs Taxed
The multi-year guaranteed annuity allows you to defer interest taxes and compound them each year. Because the tax only occurs when you withdraw the funds, this may lead to a considerable increase in wealth. It’s similar to investing in an IRA or a 401k but without restrictions.
The tax rules change depending on the type of funding in an MYGA annuity. The principal and interest will be taxed when income is withdrawn from a qualified annuity (IRA Annuity). Only the interest earned is taxed when income is withdrawn from a nonqualified multi-year guaranteed annuity.
Multi-Year Guaranteed Annuities vs. Traditional Fixed Annuities
MYGAs are a type of fixed annuity. MYGAs guarantee the same interest rate for the entire duration of the contract. Traditional fixed annuities guarantee the interest rate only for a portion of the term of the contract and then offer a different rate later on.
MYGA vs. CDs
Both MYGAs and CDs provide a guaranteed return with a guarantee on the principal. As a result, CDs and MYGAs are safer than equities like Vanguard, but the rate of return is lower.
| Feature | MYGA | CD |
|---|---|---|
| Who Offers | Insurance Company | Banks |
| Premium Amounts | $2,500 to $1 Million | $500 – No Maximum |
| Terms | 2 Years to 20 Years | 3 Months to 7 Years |
| Guaranteed Interest Rates | Up to 3.25% | Up to 1.25% |
| Triple Compounding | Yes | No |
| Principal Protection | Yes | Yes |
| Can Lose Money? | No | No |
| Liquid After Term | 100% | 100% |
| How Are Gains Taxed? | Tax-Deferred | Taxed Annually |
| Annual Liquidity | Up to 10% Annually | No Liquidity |
| Who Protects My Money? | Insurance Company/SGA | FDIC |
| Accepts IRA | Yes | No |
| Accepts 401k | Yes | No |
| Death Benefit | Lump-Sum | Lump-Sum |
Next Steps
A multi-year guaranteed annuity (MYGA) may be the right choice if you want a safe and stable investment option. These contracts offer high-interest rates that beat most CD options and protection from stock market fluctuations. Your money will also grow tax-deferred, meaning you won’t have to pay the tax on your earnings until you withdraw them and start receiving income. And if something happens to you before your contract matures, your beneficiaries will receive the death benefit included in your agreement.
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What is a multi-year guaranteed annuity?
A multi-year guaranteed annuity (MYGA) is a fixed annuity that provides a guaranteed rate of return for a specific period, ranging from three to ten years, offered by insurance companies. It offers fixed rates of return, tax-deferred growth, and principal protection, making it an attractive option for those seeking financial stability in retirement.
What are the fees on a MYGA?
Multi-year guaranteed annuities (MYGAs) typically do not have upfront fees or charges. However, the insurance company may deduct surrender charges if you withdraw funds before the end of the investment period.
What are the best 2-year MYGA rates?
As of September 2023, Clear Spring Life and Annuity Company offer the best 2-year MYGA rates, guaranteeing up to 4.60% APY.
What is the downside of MYGA?
The downside of a multi-year guaranteed annuity (MYGA) is its limited liquidity, as there are penalties for withdrawing funds before the end of the investment period. Additionally, MYGAs offer fixed rates of return, which may be lower than other investment options, such as stocks or mutual funds. This means that investors may miss out on potential gains that they could have earned by investing in other options.