Multi-Year Guarantee Annuities (MYGA)
Multi-Year Guarantee Annuities (MYGAs) are often compared to Bank Certificates of Deposit (CDs) as they share a few similar characteristics such as a multi-year interest guarantee, a high degree of safety and early withdrawal fees. However, there are distinct and substantial differences that one needs to be aware of.
Multi-Year Guarantee Annuities are a type of Fixed Annuity.
Multi-Year Guarantee Annuities (MYGAs), like other fixed annuities will guarantee the consumer a fixed rate of interest. While some fixed annuities will only give this interest rate for a portion of the term, MYGA annuities provide this rate for the entire period. For example, an eight-year fixed annuity at 3.5 percent interest, may only be guaranteed for the first five years while a MYGA fixed annuity will continue earning 3.5 percent for the full eight-year period.
Comparing Bank Certificates of Deposit with an Annuity with Multi-Year Guaranteed Returns
If you are looking for a guaranteed rate of return over a fixed term, MYGA fixed annuities will typically offer higher interest rate guarantees and tax advantages over bank CDs. However, closely examine the terms and conditions of any fixed annuity before investing.
Tax Deferral: Multi-Year Guaranteed fixed annuities offer tax-deferred growth and can be rolled over into other annuities without the transfer amount being taxed as reportable income. Traditional banking instruments such as Certificates of Deposit are not tax-deferred, so they incur taxation annually. 3
Flexible Withdrawal Privileges: Many multi-year guarantee annuities will allow up to 10 percent of the account value including interest to be liquidated annually without penalty, which is helpful for planned withdrawals or in case of unforeseen circumstances. Traditional banking instruments like CDs will require that the entire account must be liquidated in order to remove amounts of any size. Remember that IRS-imposed 10 percent early withdrawal tax penalties on earnings are applied to annuities for those under fifty-nine and one half years old. 5
Lifetime Income Option: Multi-Year guaranteed fixed annuities can provide the same income-for-life annuitization option that standard fixed annuities offer. Banking instruments, however, cannot provide this benefit because any stream of income ends once bank account values are depleted. 3
Inheritance: MYGAs can pass money directly to heirs, whereas CDs are likely to go through probate. 3
Safety: Unlike multi-year guarantee annuities issued by insurance companies, traditional banks are insured by the FDIC for up to $250,000 per account. Multi-year guarantee annuities are covered by the claims-paying ability of the issuing insurance company and their State Insurance Guarantee Association (SIGA) with coverage varying by state–SIGA should not be compared to FDIC which has the full backing of the U.S. government. The amount of SIGA coverage is dependent upon the state in which the annuity is issued, typically ranging between $100,000 and $500,000.
While over half the population of Americans between 50 and 64 years of age are familiar with CD’s, less than one-third of the population of 18 to 29-year olds know what a CD is. Annuities are even less familiar to Americans with only 35% of all Americans reporting that they have some familiarity with this type of investment. But CDs and MYGAs are standard investment tools that everyone should know about. Investing in either CDs or MYGAs can help people build savings for a new house or for retirement depending on what life stage they’re currently at. 1,2
There are different types of fixed annuities and the MYGA is just one of them. Fixed deferred annuities, single premium deferred annuities, CD-like annuities, and fixed rate annuities are other examples. In all cases, fixed annuities behave a lot like CDs except that they function as tax-deferred retirement savings vehicles while CDs don’t generate tax deferred interest. And annuities can provide a stream of payments now or later while CDs do not provide this option. 3
CDs also come in different flavors, including short term (1 year or less) and long term CDs (1 year or more), jumbo CDs (for amounts over $100,000), step up CDs (with changeable interest rates), or variable rate CDs (that vary according to a specific market index). The major differences among types of CDs has to do with term-length and interest rates. As such, annuities are more complex, but they offer more strategic growth options and a monthly income stream. 6
When interest rates are rising, it is popular to “ladder” CDs so that they reach maturity in succession and investors can achieve the highest interest rates possible while still keeping some of their funds liquid. New CD products called Step Up CDs have been developed recently that allow investors to change their interest rates a specified number of times per year or during the term of the CD. 7
When considering annuities as a way to save for retirement, investors must consider their financial needs in terms of growth, payments, and tax deferment while those who invest in CDs concentrate primarily on growth, term, and interest rates. Both fixed annuities and CDs are subject to estate tax. Though the earnings on a MYGA are not initially taxed, when the interest is withdrawn, income tax must be paid on it. Tax payments on CDs, in contrast, must be paid when they’re earned. 4
A Note on Guaranteed Returns
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
Citations.
1 - bankrate.com/investing/millennials-not-as-cd-savvy-as-rest-of-us/
2 - planadviser.com/nearly-half-48-of-investors-own-an-annuity/
3 - blueprintincome.com/resources/fixed-annuities/
4 - newyorklife.com/articles/cd-vs-fixed-deferred-annuity
5 - ameriprise.com/research-market-insights/tax-center/tax-planning/how-are-annuities-taxed/
6- money-rates.com/advancedstrategies/cd/8-types-of-cd-accounts.html
7- bankrate.com/banking/cds/how-to-invest-in-step-up-cds-in-rising-rate-environment
