What is a Multi-Year Guarantee Annuity (MYGA)?

The Annuity Man

How can people say that they “hate annuities” and love CDs at the same time?  Short answer is they can’t.  Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit).  Both guarantee an annual interest rate for a specific period of time that you choose.  Both have no annual fees, and both fully protect your principal.  It's truly an "apples to apples" comparison.

MYGAs Unique Benefit

MYGAs do have one unique feature that CDs can’t provide.  When using non-qualified (i.e. non-IRA) money, the interest earned with a Multi-Year Guarantee Annuity grows tax-deferred.  With Certificates of Deposit, you have to pay taxes on that interest every year in a non-IRA account.  Eventually, you will have to pay taxes on money taken out of a MYGA…but tax-deferral is a big deal for many people when using their non-IRA funds.

Both MYGAs and CDs can also be used inside of an IRA (i.e. qualified money) or outside of an IRA (non-qualified money).  They can also be placed inside of a Roth IRA.  Regardless of the account type, the annual percentage contractual guarantees are always the same.

Climb The MYGA Ladder

Currently, the shortest duration MYGA is one or two years (depending on your state of residence), and the most popular is the 5 year time-frame.  You can lock in MYGA rates as far out as 10 years or more, but current yield curve type analysis shows the best long term value to be at the 5 year level.

No one on the planet can “time” interest rates, so laddering MYGAs is a popular strategy in order for your money to mature at different time frames.  For example, a $300,000 MYGA ladder would have you buy a 3 year, 4 year, and 5 year MYGA each for $100,000.  Starting after year 3, you would have money maturing annually that can hopefully be transferred to a higher yielding MYGA.  That same transfer/step-up event would continue to happen as the MYGAs mature so you can build the ladder ongoing.

At the end of a MYGA duration (i.e. surrender charge) period, you have the choice of getting all of your money back with interest, or transferring to another MYGA to continue the tax-deferral.  That annuity-to-annuity transfer is a non-taxable event.  With non-IRA assets, the transfer falls under IRS Section 1035.  For IRA transfers, the MYGA within an IRA at your current annuity carrier will transfer directly to the new MYGA carrier.  Once again, both are non-taxable event transfers.

Your State Matters

Not your state of mind!...your state of residence.  Multi-Year Guarantee Annuities (MYGAs) are fixed rate annuities issued by life insurance companies, and approved at the state level.  Some states have better MYGA inventories than other states based on what products have been approved by that specific state financial regulatory body.

MYGA interest rates change frequently, and the only way to lock in a rate is to start the application process with the issuing carrier.  That rate is then locked in for the surrender charge period.  Some (not all) MYGAs allow you to take out interest or even an annual percentage penalty free.  Some don't allow any liquidity during the surrender charge time period, so you have to shop for the exact contractual benefits you need to achieve your goals.

Getting Along Together

MYGAs and CDs can work well together in a "mixed fixed" type laddering strategy.  CDs typically have higher yields than MYGAs if the time horizon is 2 years or less.  MYGAs traditionally have higher rates than CDs 3 years and out.  So an example of a $500,000 "mixed fixed" ladder would be $100,000 in both a 1 year and 2 year CD, and $100,000 each in a 3, 4, and 5 year MYGA.  That's called maximizing yield!

The bottom line is that if you are a CD buyer, you need to also look at MYGAs.  If you are a MYGA buyer, you need to start considering CDs.  When the goal is to find the highest guarantees, it's an "apples to apples" contractual choice.   

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