What is a MYGA?
(Multi Year Guaranteed Annuity)
Multi-year guaranteed annuities or MYGA’s are one of the best financial vehicles for principal protection on the market. There are no fees, and you choose a fixed term between 2 and 10 years. MYGA rates usually beat CD’s, bonds, and money market accounts and the interest compounds annually. Many MYGA’s allow you to withdraw interest so you have some liquidity if you need it.
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If you are looking for something simple and safe for your retirement funds, then a multi year guaranteed annuity or MYGA (pronounced My Guh) may be right for you. It is a mouthful to say but is surprisingly easy to understand. You may think annuities are complicated, but MYGA’s are simple.
So, what exactly is a MYGA, and when does it make sense to buy one?
What Is a Multi-Year Guaranteed Annuity?
At its core, a MYGA is the insurance companies’ version of a CD (certificate of deposit) but typically with better interest rates and more tax advantages. When shopping for a CD rates, you should compare MYGA rates because for fixed periods over 3 years, MYGA rates will almost always beat CD rates.
You hand over a lump sum of money to an insurance company, and they agree to pay you a fixed interest rate for a set number of years, usually between 2 and 10. During that time, your money grows at a guaranteed rate with no fees, regardless of what the stock market or treasury rates are doing.
For example, let’s say you buy a 5-year MYGA with a 5% guaranteed annual interest rate. That means your money grows by 5% each year for five years. No guessing, no stock tickers, no drama.
And at the end of the term, you have options:
- You can withdraw your money (plus interest),
- Roll it into another annuity, or
- Begin taking income payments if the contract allows.
It’s a strategy for people who want safety, simplicity, and a predictable return.
Key Features of a MYGA
Let’s take a quick look at the features that make MYGAs appealing:
- Principal protection: Higher APY means more opportunity to increase your balance.
- Flexible access: Start saving online or visit a branch, whichever works best for you.
- Tax deferral: Unlike a CD, interest earned in a MYGA isn’t taxed until you withdraw it. This allows your money to compound faster over time. But because it has this tax benefit, you CANNOT withdraw funds from a MYGA until you are 59 ½ without IRS penalties. So you shouldn’t consider a MYGA until you are over 50 years old.
- No market exposure: Your interest isn’t tied to any index or mutual fund, so you don’t have to worry about crashes and corrections.
Some MYGAs offer limited access to your money, such as allowing you to take out 10% per year without penalty. But taking all of your money out early beyond those allowances will trigger surrender charges and tax penalties if you’re under age 59½.
When Is the Best Time to Buy a MYGA?
Timing matters in the world of MYGAs not because of the market, but because of interest rates and your personal financial needs. Here are the best times to consider buying one:
When Interest Rates Are High or Rising
MYGAs are most attractive when interest rates are relatively high. Why? Because the insurer is locking in your rate for multiple years. If you buy a 5-year MYGA at 5.4%, you’re guaranteed that rate for the next five years even if rates fall next month. But on the flip side, if you lock in a 3% rate for 5 years, and a year later rates go up, you are still locked into the 3% rate. During low interest rate environments we do not recommend buying a MYGA for a term longer than 3 years. But during higher interest rate periods, it’s like freezing your favorite gas price during a fuel shortage. Everyone else is panicking, and you’re not worried because your rate is locked in.
When You Want a Better Option Than a CD
If you’re parking money in a bank CD and earning 3%, take a look at MYGAs. They often pay higher guaranteed rates, especially for longer terms. And unlike a bank, the interest grows tax-deferred which makes a big difference if you don’t need to access the earnings right away.
CDs are insured by the FDIC, and MYGAs are backed by state guaranty associations (with limits), so it’s important to weigh both when choosing between the two. My Annuity Agents can walk you through your options.
When You Want To Reduce Taxes
If you are trying to keep your taxes low for IRMAA purposes but you don’t want to risk your money in the market, a MYGA may be your best option. The interest continues to grow tax deferred until you withdraw. At the end of the fixed rate period if you still don’t need to withdraw funds from your MYGA for income, then My Annuity Agents will help you transfer the MYGA into a new fixed rate period so your interest earnings will continue to defer and your IRMAA will not be impacted.
When You Just Need A Little Extra Income On Occasion
If you don’t need a set amount of income every month but you like the option of drawing money when you need it, a MYGA may be your best option. Many MYGA’s allow you to peel off interest when you choose. So, when you don’t need the cash, it will continue to compound and grow. Some MYGA’s will also set up systematic interest payments so you can use the interest to live while keeping your principal protected. So if you don’t need a lot of extra money, check to see if the interest from a MYGA will provide the income you need because then you keep your principal intact.
What to Watch Out For
As with any financial product, MYGAs aren’t perfect:
- Liquidity: Your money is locked up for the fixed rate term, so don’t use emergency funds for this. In fact, insurance companies have suitability guidelines and will usually limit a MYGA purchase to 50% of your investable assets to make sure you have the liquidity you need.
- Surrender charges: Withdrawing more than allowed during the contract term could trigger fees.
- Taxes: When you eventually take money out, the interest is taxed as ordinary income, not capital gains. You also cannot withdraw funds from a MYGA before 59 ½ without IRS penalties.
Rates and terms vary between insurers, and some companies have stronger financial ratings than others. Schedule a call with My Annuity Agents to get the best quote from a safe insurance company.