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Multi-Year Guarantee Annuities (MYGAs) are also called fixed-rate annuities and are a specific annuity product type that functions similarly to a CD (Certificate of Deposit).

Both MYGAs and CDs contractually guarantee an annual interest rate for a specified period, have no annual fees and are fully principal protected.

 

Key Points:

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• No annual fees

 

• Contractually guaranteed annual interest rate

 

• Tax-deferred growth in non-IRA accounts

 

• Rates are typically higher than CDs

 

• Interest compounds tax-deferred in a non-IRA account

 

• Can be purchased inside of an IRA or non-IRA account

 

• Easy to understand

 

• No moving parts or market attachments

 

• Can be laddered like CDs and Bonds

 

• Full principal protection

 

• Can be transferred to another MYGA without tax consequences

 

Comparing MYGA With CD

 

Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit). Both MYGAs and CDs allow you to contractually lock in a specific annual interest rate for a duration of time you choose at the time of application. MYGAs can be as short term as 2 years and you can lock them in for as long as 20 years.

 

MYGAs have no annual fees, no moving parts, and provide full principal protection while guaranteeing an annual interest rate. If you are a current CD buyer, then you should also be a MYGA buyer.

 

The primary difference between a MYGA (i.e. annuity contract) and a CD is that in a non-IRA (i.e. non-qualified) account, the MYGA interest grows tax-deferred with no tax penalty on the interest earned. With CD's in a non-IRA account, you must pay taxes annually on that guaranteed interest rate that is credited. This tax-deferral benefit does not make MYGA's better than CD's, it is just the primary contractual difference between the two strategies.

 

MYGA's can also be transferred from one MYGA to another in a non-IRA account, without creating any tax consequences. In other words, that annuity to annuity transfer would be a non-taxable event using the IRS approved 1035 exchange rule. MYGA's inside of an IRA can also be transferred via a non-taxable event as well. That would be an IRA to IRA transfer and would not trigger any taxes.

 

After the surrender charge period ends, you can also transfer a MYGA to another type of annuity as well. For example, you can transfer the full MYGA proceeds to a SPIA (Single Premium Immediate Annuity) if you need income to start now.

 

Another example would be to transfer your MYGA to a DIA (Deferred Income Annuity) if you need income guarantees to start at a future date. In each case, the initial cost basis would transfer to the receiving annuity strategy...and that transfer would be a non-taxable event as well.

 

The other difference between MYGA's and CD's is the backing or insurance behind the product. MYGAs are fixed annuities that are issued by life insurance companies and regulated at the state level. Each state has its own State Guaranty Fund that backs MYGA's to a specific dollar amount. Each state has different coverage, so go to www.nolhga.com to check your specific state of residence coverage.

 

MYGA's and CDs can work well together to create a fixed rate ladder strategy. Historically, we have found that MYGA's provide higher rates than CD's if the contracted term is 3 years or more. For less than 3-year time periods, CDs typically provide the highest annual rates.

 

With most MYGAs, you can choose to peel off the interest penalty-free. Peeling off the interest is not considered “partial withdrawals” because the principal is never touched. If you do decide to dip into the principal, there will be surrender charges during the specific locked-in period. This interest only strategy can be part of your retirement income plan, in combination with Social Security, pensions, etc.

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Coverage Summary

 

MYGAs can be set up with one owner, or with joint ownership. Also, the listed beneficiaries on the policy can be changed by the owner(s) at any time as long as they are alive. In other words, your policy beneficiaries are revocable...not irrevocable. That is important if your beneficiary listings need to be changed or updated.

 

Before you purchase a MYGA, you need to read my MYGA Owner’s Manual and speak with me personally before you make a decision. We have a live feed of the best MYGA rates that you can look at and shop around without having to sign up. Most MYGAs allow you to peel off the interest penalty-free, but not ALL do.

 

There is never an urgency to buy a MYGA (or any annuity for that matter), the only urgency is to fully understand the benefits and limitations of the MYGA you are specifically considering.