What Are MYGA Annuities and What Can They Provide You?
Categories: Annuity Education, Investing
Buying a fixed-rate guaranteed (MYGA) annuity can be an effective strategy for accumulating funds on a tax-deferred basis that can be converted to income during your retirement. As with other annuities, you purchase a MYGA annuity by submitting a completed application kit provided by the issuing insurance company. This is typically done with the assistance of a licensed insurance agent that is contracted with the company.
Unlike traditional fixed annuities, MYGA annuities guarantee a set interest rate on your premium deposit for a specified period designated in the contract. This guaranteed interest rate typically lasts anywhere from 2-10 years and it is the reason why these types of annuities are often compared to bank certificates of deposit (CDs).
How Do MYGA Annuities Work?
MYGA annuities accumulate interest over a specified period of time with a lump sum premium deposit used to purchase the annuity. If the owner needs to withdraw money from the annuity before the guarantee period ends, they may have to pay surrender charges, depending on the contract. However, many annuity products feature penalty-free withdrawal provisions (typically around 10% annually) that let you make partial withdrawals before the surrender period is over.
Once the initial guarantee period is over, the insurance company will give you the opportunity to renew for another term at a new interest rate. If you decide to accept the renewal rate, your same annuity contract will continue to accrue interest at the new rate. If the new rate is not acceptable, most MYGA annuities offer a penalty-free withdrawal window, during which, you can cash out or complete a transfer or exchange to a new annuity with a different company. Transferring a non-qualified annuity to a higher yielding annuity with a new company is accomplished via a tax-free 1035 exchange. Lastly, you can choose to withdraw your entire contract value without penalty.
Primary Benefits of MYGA Annuities
The primary benefits of MYGA annuities are their tax-deferral capabilities and higher interest rates when compared to bank certificates of deposit. Because CD interest rates struggle to keep up with inflation and tax your interest earnings each year, MYGAs can be a better financial product to protect yourself against inflation. They also typically feature withdrawal provisions that save you from incurring penalties.
Supplemental Benefits to MYGA Annuities
- Purchasable with both non-qualified or tax-qualified IRA funds
- Liquidity options for penalty free and systematic withdrawals (Get Income Now)
- Lifetime income options available (Guarantee Future Income)
- Free from market risk and price fluctuations
- Guaranteed principal
- Avoids probate, passing to named beneficiaries at death
- No fees, loads or upfront sales charges
How Are MYGA Annuities Similar and Different From CDs?
Certificates of deposit are similar to MYGA annuities because they guarantee interest for a specific period of time. CDs are guaranteed by the FDIC, whereas MYGA annuities are contractually guaranteed by the government-regulated “legal reserve” insurance company that issues them. One of the most important differentiating factors of MYGA annuities is that they can potentially provide higher interest earnings than CDs.
CD interest rates haven’t kept pace with inflation over the past years, which means your money in a CD is actually losing purchasing power. Additionally, the little interest generated in a CD is taxable each year, even if you elect not to withdraw it. On the other hand, MYGA annuities guarantee your interest at an average rate that is typically much higher than a bank CD of the same term. They can also eliminate the annual tax burden because taxes are deferred and not owed until interest earnings are withdrawn, at a time of your choosing. This represents some of the tax-deferred interest growth benefits of a MYGA annuity.
MYGA Annuities Vs. Traditional Fixed Annuities
MYGA annuities are a type of fixed annuity but they differ from traditional fixed annuities in the way that their interest guarantees are structured and paid. MYGAs guarantee a set interest rate for a multi-year period of time, typically 2-10 years. Once the initial guarantee period is up, you will usually have a few options to choose from regarding a renewal interest rate, should you decide to continue your contract. Traditional fixed annuities might only provide a stated interest rate for the first contract year and then declare a new rate for each subsequent year, at the discretion of the insurance company, with an underlying minimum interest rate guarantee. For example, you might purchase a traditional fixed annuity with a seven year surrender term where only the first years interest rate is known in advance.
Who Is a MYGA Annuity Good For?
MYGA annuities are particularly appealing to someone close to —or already in— retirement. Because most retirees are living off savings, they might have a substantial amount of money tied up in savings accounts. This money becomes less and less valuable the longer it stays in the account due to inflation. While having savings for an emergency fund is advisable, there’s no sense leaving a significant portion of your money in your savings account when it could be generating a much higher interest rate.
Those purchasing a MYGA annuity should be comfortable with having limited access to the funds used to purchase the annuity. For example, purchasing a 3-year MYGA annuity with $75,000 worth of savings could give you a sizable interest return if you don’t need to access that money. Because the interest rate is fixed for those three years, you wouldn’t have to worry about your interest rate fluctuating, allowing for smarter budgeting. At the end of your MYGA’s initial guarantee period, you also have flexibility. It’s not just the higher interest rates and more favorable withdrawal policies compared to CDs that make MYGA annuities appealing. MYGAs can also give you the freedom to reevaluate after a short period of time.
MYGA interest rates fluctuate depending on the economic environment as well as the insurance carrier and can change daily. For example, the highest MYGA rates for a 5-year MYGA annuity in early December of 2022 was 5.65%. These rates compound annually and as mentioned earlier, are usually much higher than a bank CD of the same term. Typically, the more limitations you have on your MYGA’s penalty free withdrawal provisions, the higher your interest rate will be.
Withdrawal provisions are contract stipulations that allow you to withdraw certain amounts without penalty before your surrender term is up. Without these provisions, you will have to pay surrender fees. Most MYGA annuities feature penalty free withdrawal provisions, many of which let you withdraw up to 10% of your annuity value each year. It’s important to note that withdrawal provisions depend on the individual MYGA contract. MYGA annuity contracts might also lay out plans for emergency withdrawals that prevent you from having to pay surrender fees under certain circumstances, such as a long-term nursing home stay or terminal illness. Regardless of withdrawal provisions, one of the most important benefits of your MYGA annuity is the tax-deferred interest it can accumulate for distribution at a later date.
MYGAs offer tax deferral on interest that is compounded annually. This can generate wealth exponentially since you only incur taxes when you withdraw your interest earnings. You can liken this to investing in an IRA or 401(k) without contribution limits.
Your tax treatment will vary depending on whether you use qualified or nonqualified funds to purchase your annuity. For example, if you use money from your traditional IRA to purchase an annuity, you will pay taxes on both the principal and the interest when you withdraw your money. If you use nonqualified funds, you will only pay taxes on the interest portion. This benefit is not exclusive to MYGA annuities.
Let AnnuityAdvantage Guide You to the Right Annuity for Your Retirement
When making any significant financial decision, it’s important to ensure you have the right guidance. Choosing the annuity that suits your retirement goals is no different. Having a competent licensed annuity agent that puts your best interest first can mean the difference between enjoying your golden years and regretting your decision.
AnnuityAdvantage is the easy, informed way to make the most out of your annuity purchase. Since 1999, we’ve been guiding clients through the annuity selection process. Contact us today and plan your future with AnnuityAdvantage. Our principal-secured annuities can help lead you to the financial freedom you desire during your golden years.