MYGA stands for Multi-Year Guaranteed Annuities
MYGAs are a type of fixed rate annuity offered by insurance companies. They are viewed as retirement products designed to grow the owner's savings at a fixed interest rate for a certain period of time, just like a bank certificate of deposit (CD) might. However, one benefit of MYGA annuities is that they tend to be longer-term in nature relative to bank CDs, enabling their owner to potentially lock in a fixed rate for a longer period of time. These annuities are thus known for their predictability and security—both the principal and interest income are guaranteed by the insurers that issue and back them.
Here are the key characteristics and features of MYGA annuities:
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Guaranteed Interest Rate:
With MYGA annuities, the insurance company guarantees a fixed interest rate for a specific amount of time, typically ranging from 2 to 10 years. This means that your money will earn a fixed rate of return over the chosen period, regardless of fluctuations in the financial markets—even if the stock market goes down, your interest income is guaranteed by the insurer. Oftentimes, this guaranteed MYGAs interest rate can be higher than the interest rates offered by bank CDs.
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Guaranteed Principal Protection:
Multi-year guaranteed annuities offer protection of the initial cash you put into the MYGA (the principal). Regardless of market downturns or economic uncertainties, the insurance company provides a guarantee that your principal will remain intact, so you won't lose any of your initial cash principal.
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Tax-Deferred Growth:
One of the main MYGA annuities’ advantages is that they offer tax-deferred growth. They are thus akin to 401K accounts and IRAs that allow you to compound interest annually while deferring taxes. This means that any interest earned on the annuity is not subject to taxes until you start withdrawing the money. Your interest earned each year gets reinvested in the MYGA and compounds in a tax-deferred manner. For example, if you have a 5-year multi-year guaranteed annuities that matures in five years, and you didn't take any money out until it matures—only at that point would you be taxed.
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No Market Risk:
Unlike other types of annuities, MYGAs do not expose you to market risk. Since the interest rate is fixed and guaranteed, your earnings are not affected by market fluctuations. Your principal is also guaranteed and not affected either by market fluctuations.
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Withdrawal Penalties:
While MYGA annuities provide financial security, they also come with surrender periods. Typically, the period is the same as the term of the MYGA. For example, a 3-year annuity that matures in three years will typically have a surrender period of three years. During this period, usually equal to the term length, if you withdraw more than a certain percentage of your annuity, you may incur surrender charges. These charges gradually decline over the surrender period. Note that there are liquidity and no liquidity versions of MYGAs—typically, a liquidity version will give the owner the ability to withdraw a certain percentage (e.g., 10%) of the balance each year with no surrender charge penalties.
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Intended for Retirement Savings:
Furthermore, multi-year guaranteed annuities are generally intended to be used for your retirement savings. Just as the IRS levies a 10% penalty tax on early withdrawals from your IRA before you reach 59½ years of age, it similarly levies a 10% penalty on early withdrawals from the MYGA when you're under 59½ years of age, while there are some exceptions. For early withdrawals from a pre-tax, qualified MYGA annuities, the entire distribution amount may be subject to this penalty. However, if you withdraw money early from a post-tax, non-qualified MYGA annuity, typically only your interest earnings will be subject to the penalty. Consult your tax professional to better understand how you may be taxed on withdrawals from your MYGA.
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Retirement Income:
After the MYGA annuity term ends, you have several payout options. You can choose to withdraw the money as a lump sum, convert it into a different annuity, which is known as an exchange, or opt for a series of regular payments (i.e., annuitizing), turning it into a guaranteed income stream during your retirement.
It's important to note that, like most things, MYGA annuities have pros and cons. For instance, they might not provide as high returns as some other options to park your money like stocks and equities, but they can offer a level of stability and certainty that can be appealing to those seeking to safeguard their retirement funds and savings from market volatility and economic uncertainty, as the MYGA contract is guaranteed and backed by the creditworthiness of the individual that is issuing the insurance contract.
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Note: This summary is a generalization. This summary does not cover all products or companies that offer them. Please review each product's specific terms and features, as they may differ from the details in this summary. Updated as of July 19, 2023.