If you’re looking for a predictable interest rate, protection from stock market losses, and a way to grow retirement savings tax-deferred, you may have come across a MYGA, or Multi-Year Guaranteed Annuity.
MYGAs can be an option for people who want to protect a portion of their retirement savings while earning a guaranteed rate of interest for a specific period of time.
But how does a MYGA work, and how does it compare with a CD, fixed annuity, or other retirement strategies?
What Is a MYGA?
A MYGA (Multi-Year Guaranteed Annuity) is a type of fixed annuity issued by an insurance company. It provides a guaranteed interest rate for a predetermined number of years, assuming the contract is held according to its terms.
For example, a MYGA might guarantee an interest rate for:
- 2 years
- 3 years
- 5 years
- 7 years
- 10 years
Think of a MYGA as a way to lock in a fixed rate for a specific period while receiving the tax-deferred treatment associated with annuities.
The rate available depends on the insurance company, contract term, amount deposited, and interest-rate environment.
How Does a MYGA Work?
Suppose you deposit $100,000 into a 5-year MYGA.
The insurance company guarantees a stated interest rate for the five-year term. Interest accumulates according to the contract, and you generally don’t owe income tax on the interest each year while it remains inside the annuity.
Instead, taxation is typically deferred until money is withdrawn.
At the end of the guarantee period, depending on the contract, you may have several options, such as renewing the annuity, selecting another available guarantee period, transferring the money to another annuity through a properly structured 1035 exchange, or withdrawing the funds.
Specific options vary by insurance company and contract.
What Are the Potential Benefits of a MYGA?
One reason MYGAs can appeal to retirees and conservative investors is their predictability.
Principal protection: A MYGA isn’t directly invested in the stock market, so its value isn’t subject to daily stock market fluctuations.
Guaranteed interest rate: The issuing insurance company guarantees the stated rate for the selected term, subject to the contract’s provisions.
Tax-deferred growth: Interest generally isn’t taxed until it is withdrawn. This can allow money that otherwise might have gone toward current taxes to remain in the contract and continue compounding.
Predictability: You know the contractual interest rate in advance, which can make a MYGA useful when building a more conservative portion of a retirement strategy.
Potential retirement-planning flexibility: MYGAs can sometimes be incorporated into strategies involving IRAs, retirement income planning, and conservative asset allocation.
MYGA vs. CD: What’s the Difference?
MYGAs are frequently compared with bank certificates of deposit (CDs), but they’re not the same product.
A CD is a bank or credit-union product, while a MYGA is an insurance contract.
CD interest held in a taxable account is generally taxable annually as it is credited or accrued. A MYGA’s interest generally grows tax-deferred until withdrawn.
There is another important difference: MYGAs are not FDIC-insured bank deposits. Guarantees are based on the claims-paying ability and financial strength of the issuing insurance company.
That’s why evaluating the insurer, contract provisions, surrender schedule, liquidity features, and your financial situation is important before purchasing a MYGA.
What Happens If You Need Your Money Early?
This is one of the most important questions to ask before purchasing a MYGA.
MYGAs typically have a surrender-charge period. If you withdraw more than the contract permits during that period, surrender charges may apply. Some contracts may also include a market value adjustment or other provisions that can affect the amount received.
Many MYGAs provide some form of penalty-free withdrawal provision, but the rules vary significantly by contract.
That’s why a MYGA generally shouldn’t be viewed as a replacement for an emergency fund or other money you may need on short notice.
Are MYGA Withdrawals Taxable?
For a nonqualified MYGA purchased with after-tax dollars, earnings are generally taxable as ordinary income when withdrawn.
Special tax rules determine whether a withdrawal is treated as earnings or return of principal.
If the MYGA is purchased inside a traditional IRA or another tax-deferred retirement account, the tax treatment is generally based on the rules governing that retirement account.
Withdrawals before age 59½ may also be subject to an additional federal tax unless an exception applies.
Because tax situations differ, it’s important to consult an appropriate tax professional about your individual circumstances.
Is a MYGA Right for Retirement?
A MYGA may be worth considering if you’re looking for:
- Protection from direct stock market losses
- A guaranteed interest rate for a specified period
- Tax-deferred accumulation
- A conservative place for a portion of retirement assets
- Greater predictability within your retirement strategy
However, a MYGA isn’t appropriate for everyone.
Liquidity needs, inflation, taxes, surrender charges, the financial strength of the insurance company, other retirement income sources, and your overall investment strategy should all be considered.
Where Does a MYGA Fit in a Retirement Plan?
At Venn Financial Solutions, we believe financial products should be evaluated as part of the overall financial plan—not in isolation.
For someone approaching or already in retirement, that means looking at questions such as:
Protection: How much of your retirement savings should be protected from market volatility?
Income: Where will your dependable retirement income come from?
Growth: How much should remain positioned for long-term growth and inflation?
Legacy: What assets do you want to leave to your family or other beneficiaries?
A MYGA may help address one part of the retirement puzzle, but it should be evaluated alongside Social Security, pensions, IRAs and 401(k)s, investments, taxes, Medicare and healthcare expenses, and estate or legacy goals.
Looking for MYGA Rates in Pennsylvania?
If you’re researching MYGA rates, fixed annuities, retirement income strategies, or principal-protection options in Pennsylvania, don’t focus on the interest rate alone.
Two MYGAs offering similar rates can have very different surrender schedules, withdrawal provisions, renewal terms, insurer ratings, and contract features.
At Venn Financial Solutions, we help individuals and families in DuBois, Altoona, and throughout Pennsylvania evaluate retirement strategies based on their complete financial picture.
The goal isn’t simply to find an attractive rate. It’s to determine whether a MYGA makes sense for your retirement plan and how it fits alongside your other investments and income sources.
Have an Old CD, IRA, 401(k), or Money Sitting in Cash?
If you’re approaching retirement and wondering whether a MYGA or another retirement strategy could be appropriate for a portion of your savings, we can help you evaluate your options.
Venn Financial Solutions
Serving DuBois, Altoona, and clients throughout Pennsylvania
In-person and virtual appointments available
Important Disclosure: Annuities are insurance products and are not deposits or obligations of a bank, are not FDIC insured, and are subject to the claims-paying ability of the issuing insurance company. Guarantees apply according to the terms of the insurance contract. Surrender charges and other restrictions may apply. This material is for educational purposes only and should not be considered individualized investment, tax, or legal advice.
