MYGA annuities are a specific type of annuity that guarantee interest rates for the entire period of the contract. Traditional fixed annuities typically only guarantee interest rates for a fraction of the specified time period. MYGA contract durations are typically anywhere from 3-10 years and they are most appropriate for those nearing retirement preferring tax-deferred earned interest and a guaranteed rate of return.
These types of annuities are suitable strategies to supplement income in retirement and add to social security benefits. They offer the potential to grow your money without incurring substantial risks and they are also known as CD-type annuities because they share some of the same benefits and features as certificates of deposit, issued by banks.
How Do MYGA Annuities Work?
MYGAs require you to sign a contract with an insurance company in which you pay them the premium in exchange for a guaranteed fixed interest rate on the contribution for a specified time. The term for this can be anywhere from 3-10 years and any time in between.
You tie a lump sum of your money in a MYGA annuity so that it can accumulate interest over time. If you need to withdraw money from the annuity before reaching the accumulation period, you will likely incur fees or surrender charges. Your annuity provider might include a penalty-free withdrawal provision that lets you make partial withdrawals before the surrender period ends.
Once the accumulation period is over, you can receive the premium and the interest earned or you will have the choice to renew your contract. If you choose to renew the contract, your interest rate is subject to change from the original interest rate. You will also have the opportunity to transfer your funds to a different annuity. If you choose to do this, you can do so with a 1035 exchange form.
Because the interest rates are set by the insurance companies that sell them, you must conduct extensive research before purchasing your annuity.
MYGa rates typically vary from carrier to carrier and they are subject to daily changes. For example, the best rate for an MYGA annuity in September of 2020 was 3 percent over a 10-year period. The best rate for a MYGA with a seven-year surrender period was 2.9 percent. These rates have since changed and MYGAs rate are typically higher than CD rates. They also compound each year and a contract with more limiting withdrawal restrictions will have higher rates.
MYGAs typically include surrender chargers, meaning if you own the annuity, you might have to pay fees if you want to withdraw the money before the end of the term. Many annuity providers offer penalty-free withdrawal provisions so you can withdraw some of the money before the surrender period ends. For example, some contract allow you to withdraw up to ten percent starting in the first year.
These withdrawal provisions depend on the terms of your contract. However, you can typically withdraw a specified portion of your funds during the term penalty-free and details should be specified in the annuity contract.
Your contract can also stipulate money withdrawals for emergencies without incurring penalties. For example, if you need funds for a medical bill, your contract might specify these extenuating circumstances. With an MYGA annuity, the terms are typically more favorable than getting a 401(k) loan or withdrawing funds from an IRA.
Whenever considering pulling money out of an MYGA early, you must understand that one of the most compelling benefits of a MYGA annuity comes from the tax-deferred benefits it offers.
Tax deferred interest is one of the most compelling benefits of a MYGA annuity. This tax-deferral happens on an annual basis and creates additional wealth exponentially because your interest compounds tax-free. In this way, inputting money into a MYGA annuity is similar to investing in a 401(k) but without the contribution limits.
Depending on the funds you use, your tax rules will change. For example, if you use qualified funds to purchase your MYGA annuity, you will have to pay taxes on your entire withdrawal. If you use nonqualified funds (money that has already been taxed by the IRS) you only pay taxes on the interest accrued. This tax benefit is not unique to MYGAs, either. It also applies to traditional annuities.
MYGAs Vs. Traditional Annuities
MYGAs are a type of fixed annuity. However, there is a difference between a MYGA and a traditional fixed annuity. The difference is that MYGAs specify an amount of time that the contract guarantees the fixed interest rate.
For example, a MYGA annuity will guarantee an interest rate for the duration of the contract, say 10 years, at which point, you can either choose to renew the contract. Traditional fixed annuities may only guarantee the interest rate for a portion of the contract. So, on a seven-year traditional fixed annuity, you might only have your interest rate guaranteed for four years.
MYGAs Vs. CDs
MYGAs and CDs are similar in that they offer guaranteed rates of return and principals. They feature safer guarantees on their rates of return than investments such as common stocks and mutual funds. However, there are several key differences you should consider when choosing a MYGA annuity or CD.
- CDs are issued by a bank or broker. MYGA annuities are insurance contracts and considered financial products.
- CDs are FDIC-insured and MYGA annuities are not insured by the federal government. However, the insurance company selling the MYGA annuity must belong to their state’s guaranty association.
- CDs typically incur penalties for withdrawing money prior to its maturity. MYGA annuities typically allow for you take out some of the money annually without incurring penalties.
- CDs may have a lower interest rate than a MYGA. MYGAs typically have more fees associated with them.
- CDs interest is taxed annually. MYGA annuities offer tax-deferred growth.
What Is a MYGA Annuity?
With any financial product, you have to weigh the pros and cons according to your circumstances. For consumers nearing retirement, MYGAs offer safe bets and tax-deferred opportunities. Younger investors looking for higher growth opportunities should avoid MYGAs. If you’re looking for a replacement to retirement income, other types of annuities make more sense.