Similar to a Bank CD, MYGAs offer a fixed amount of interest for a specified period of time. The more years you commit to park your money, the higher rate of interest offered.
MYGA have tax deferral growth, and typically higher interest rates than Bank CDs.
In July 2018 the highest advertised rate for a 5 yr. CD was 3%, While a 5yr. MYGA was offering 4%.
Q. What is a multi-year guaranteed annuity (MYGA)?
A multi-year guaranteed annuity is a single-premium fixed rate deferred annuity. It’s a contract between you and an insurance company. You make one lump-sum investment, decide when you want it to pay out. You’ll already know how much money you’ll receive, and when.
A MYGA, also called a fixed deferred annuity, might be a good tool for money you don’t need to spend right away, so you get more money later. They’re offered for terms lasting from 3 to 10 years.
Q. How do MYGA rates compare to CD rates?
Usually, MYGAs offer higher interest rates than CDs. Also, the interest is not taxed until it is removed from the annuity. In other words, your annuity grows tax deferred and the interest is compounded each year. However, comparison shopping is always a good idea.
Q. How does a deferred annuity differ from a Bank Certificate of Deposit (CD)?
A major difference is in the tax treatment of these products. Interest earned on CDs is taxable at the end of each year (unless the CD is held within tax qualified account like an IRA).
Q. CDs are insured by the FDIC. Are MYGAs also insured?
It’s true that CDs are insured by the FDIC. However, MYGAs are insured by the individual state insurance guarantee fund — usually, in the range of $100,000 to $500,000. It’s a good idea to research your state guaranty association before you invest.
Q. If I buy a MYGA, is my money safe? What are the risks?
When you buy an annuity from a high-quality insurance company, your investment is safe, and so is your return. In fact, with a MYGA, your only risk is that the insurance company you buy from might fail. For that reason, it’s important that you choose a financially secure insurance company.
A company’s financial strength can be an indicator of its future reliability. Be sure to review each insurance company’s financial ratings (A.M. Best, S&P, Moody’s).
Your state insurance guaranty insures up to a certain limit. If you want to invest more than the state-insured limit, and you are concerned about the risks, you can divide your initial payment among multiple insurers, setting up separate annuities and spreading the risk.
Q. Are there fees when placing my money in a MYGA?
There are no sales charge or annual fees in the purchase of a MYGA contract.
Q. Am I able to make withdrawals from my deferred annuity?
In most cases deferred annuities allow an amount to be withdrawn penalty-free. However, the allowable withdrawal amount can differ from company-to-company, so be sure to read the product brochure carefully.
Q. What fees will be charged for early surrendering of the MYGA?
Most MYGAs have a decreasing surrender fees that get reduced each year closer you are to the maturity date you set up when you put your money in. The surrender charge could be as high as 10% in the first year. Oftentimes, the surrender fee will decline by 1% each contract year. A surrender fee would be charged to any withdrawal above the penalty-free amount allowed by your MYGA.
Q. Am I able to access my money in the case of an emergency?
Some MYGAs allow you to make early withdrawals for emergencies, such as health expenses for a serious illness, or confinement to a nursing home. Early withdrawal terms in MYGAs vary greatly, so make sure you understand what you want and what you’re getting before you settle on a particular annuity. Once you do, it’s best to see it through to the end.
Q. What are my choices at the end of the annuity surrender charge period?
You have several options. Either you take your money in a lump sum, reinvest it in another annuity, or you can annuitize your contract, converting the lump sum into a stream of income. By annuitizing, you will only pay taxes on the interest you receive in each payment.
In most cases, you have 30 days to inform the insurance company of your intentions. If you don’t give any instructions to the insurance company, then the annuity will automatically renew at the interest rate available at that time.
If you decide to take a lump sum, keep in mind that you may be pushed into a higher tax bracket in the year that you receive it.
Q. What happens to my annuity if I die?
Most deferred annuities offer your beneficiaries an option of withdrawing the full account value (death benefit) without incurring any surrender fees. Several companies offer spousal continuance, meaning if you list your spouse as the primary beneficiary, he/she will be able to take ownership of the policy after your death.
Additionally, some contract will allow beneficiaries to convert the lump sum to an immediate annuity. These features can vary from company-to-company, so be sure to explore your annuity’s death benefit features.
Q. What are the advantages of purchasing a MYGA?
There are several advantages.
- A MYGA can mean lower taxes than a CD. With a CD, the interest you earn is taxable when you earn it, even though you don’t receive it until the CD matures. With a MYGA, you don’t owe taxes until the end of the annuity period. So at the very least, you pay taxes later, rather than sooner. Not only that, but the compounding interest will be based on an amount that has not already been taxed.
- Your beneficiaries will receive the full account value as of the date you die—and no surrender charges will be deducted. The beneficiaries are the people you name when you establish the annuity who will receive the money if you die before the annuity is scheduled to pay. Your beneficiaries can choose either to receive the payout in a lump sum, or in a series of income payments.
- Often, when someone dies, even if he left a will, a judge decides who gets what from the estate as sometimes relatives will argue about what the will means. That’s called probate. It can be a long, complicated, and very expensive process. People go to great lengths to avoid it. But with a multi-year fixed annuity, the owner has clearly designated a beneficiary, so no probate is required. The money goes directly to the beneficiary, no questions asked.
Q. What kind of person does a MYGA suit best? What kind of person is NOT right for a MYGA?
Most commonly used by retirees or people nearing retirement. That’s because the IRS imposes a 10% penalty on gains you withdraw from your MYGA if the owner is under age 59 1/2. This penalty applies only to the gains—not the initial investment amount. That penalty does not apply on withdrawals if the owner is at least 59 1/2. However, the maximum age for purchasing a MYGA is often 80-85 years.
If you are younger, it will still make a lot of sense when the MYGA rate – the 10% pre-59 ½ penalty equals higher than the similar CD rate (which it usually does), or if you are going to leave the funds in the MYGA until after age 59 1/2.
MYGAs are great for people who want to avoid the risks of market fluctuations, and want a fixed return and tax deferral. If your time horizon extends at least three years, then you are a candidate for a MYGA, especially if tax deferral is an important feature to you.
They might be less suitable for people who may need or want the money sooner; and people who would rather take bigger risks, in hope of getting bigger returns.
Q. Can you do MYGA laddering just like CD laddering?
Sure. In the recent environment of low interest rates, some MYGA investors build “ladders.” That means buying multiple annuities with staggered terms. This way, they come due at regular intervals and the proceeds can be reinvested in the hope of catching an upswing in interest rates. For example, if you opened MYGAs of 3-, 4-, 5- and 6-year terms, you would have an account maturing annually after three years. At the end of the term, your money could be withdrawn or put into a new annuity–with luck, at a higher rate.
Your laddering maturity dates also give you access to the gains at shorter intervals without any early surrender charges.
You can include MYGAs together with stock and bond mutual funds, CDs, and other types of investments. MYGAs can be a very helpful element of your overall retirement planning.
Q. What else do I need to know about MYGAs?
We offer a comprehensive selection of contracts from many insurance companies, with different terms and interest rates. The rates are always changing and we have access to find the best rates available. When you decide on one, the interest rate will be fixed and guaranteed for the term you select.
To schedule a time to discuss your financial future, contact us at firstname.lastname@example.org , or call us at 732-806-0017 today!