Annuities can be a confusing concept for many people, but understanding how MYGA annuities work is an important part of financial planning.
Not only do they provide tax-deferred growth potential, but they also offer guaranteed payments that are not subject to market fluctuations. With the right approach, MYGA annuities can be a great way to ensure your retirement savings last as long as you do.
The annuities market is booming — 2022 saw an estimated increase to nearly $300 billion in annuity sales. Experts attribute this to a reaction toward the volatile stock market and growing concerns about the U.S. economy. With products like annuities, you’re able to count on a more reliable financial growth strategy that is not directly impacted by the ups and downs of the stock market and other macroeconomic conditions.
Knowing what annuity options are available and which ones best fit your needs is essential in order to make an informed decision about these types of investments. Let’s dive into the essentials of MYGAs and explore who is a good fit for them.
What Is a MYGA?
MYGA (multi-year guarantee annuity) is a type of fixed annuity that provides guaranteed income for multiple years. As with other annuity products, it offers a secure, reliable income stream that can help you reach your retirement goals.
You can purchase a MYGA by simply completing an application with a trusted issuing insurance company, like ELCO Mutual. The best way to navigate this process is to work closely with your insurance company’s licensed insurance agents.
How Does a MYGA Annuity Work?
When you purchase a MYGA, you are signing a contract with your insurance company. This contract outlines that you, as the annuitant, pay your insurance company a lump sum payment or a series of payments as a premium.
As the annuity holder, you get a guaranteed fixed interest rate on the contribution for a defined time period. The period of time will be defined in your contract.
This can be three years, five years, 10 years, or anywhere in between that range. Annuitants essentially invest their sum of money into this product to accumulate interest.
You may withdraw your money before the accumulation period ends, but you will face fees, often referred to as surrender charges. However, some providers include withdrawal provisions that are penalty free, enabling you to make partial withdrawals without paying for any surrender charges or other fees.
At the end of your accumulation period, you can earn the premium you paid along with the interest you earned. Alternatively, you may be able to renew your contract, but your interest rate may be different from the rate you secured in your previous MYGA contract.
You can also transfer your MYGA funds to a different kind of annuity by using a 1035 exchange, which enables you to avoid tax penalties.
MYGA vs Fixed Annuity
When you understand how annuities work, you can learn about the nuances between different types of annuities. Both options — MYGA annuities and fixed annuities — are types of annuities that provide you with an income. However, there are notable differences in both of these options.
With a MYGA annuity, you’re locking in an interest rate for a defined period of time, as noted in your contract. This guarantees that your money will accrue a defined level of interest, which provides peace of mind.
On the other hand, traditional fixed annuities might not hold the same guarantee. In fact, your interest rate is likely to change with these types of contracts.
For example, if your fixed annuity comes with a 10 year term, your interest rate may only be guaranteed for the first five years. That rate can then change, making it harder to understand the projected growth of your investment in your annuity.
Features and Considerations for MYGA Annuities
When shopping for MYGA annuities, there are several features and considerations you should take into account. The most common aspects to research further include the following:
MYGA Interest Rates
Interest rates for MYGAs can vary significantly depending on many variables, such as your insurance carrier and the current economic climate. These rates can change frequently, so you will likely not get the same rate if you’re seeking quotes on different dates.
It is important to compare different MYGA policies and the corresponding rates before making your decision. Also, keep in mind that each contract will be different in terms of limitations that you have for withdrawals.
For example, if your insurance company includes several limitations on your withdrawal rules, you can expect a higher interest rate. But if you’re wanting more withdrawal provisions, your interest rate will likely be lower. This is a general rule of thumb, not a hard and fast rule.
In terms of withdrawal provisions for annuities, you need a MYGA that fits your unique situation. If you expect to never touch your account, then opt for an annuity that includes fewer provisions. But, if you may need access to your money held in your account, consider a contract that includes penalty-free withdrawals that work for you.
Generally speaking, many MYGAs permit annuitants to take out up to 10 percent of their annuity value each year without penalty. Keep in mind that some MYGA contracts can include emergency withdrawal provisions, where you’re able to take out money without paying a penalty. For example, if you’re needing money to pay for long-term nursing home care, that may qualify as an emergency withdrawal.
Communicate your needs with your insurance agent. They will help you find the best type of annuity for your situation and ensure that it aligns with your financial goals.
There are several tax advantages for annuities. Similar to IRAs and 401K accounts, MYGAs allow you to compound interest annually with a tax deferral. You only pay taxes when you withdraw your interest earnings.
Your taxation comes down to how you purchase a MYGA. You can use qualified funds (from accounts you have not paid taxes on, like traditional IRAs) or nonqualified money (from accounts that have already been taxed, like a savings account) to pay for your MYGA.
If you use qualified funds, you pay income tax on the principal and the interest when you take out the money. With nonqualified funds, you only pay taxes on the interest when you withdraw from your MYGA.
Benefits of a MYGA Annuity
There are several notable advantages to using a MYGA for financial planning and retirement.
- Your account is tax deferred, and you can transfer to a higher yielding annuity with a tax free 1035 exchange to continue growing your investment.
- Your money is safe even if markets go down because the payouts are guaranteed by your insurance company that provides the annuity.
- As compared to certificates of deposit (CDs), MYGAs can protect you against inflation because the MYGA provides a higher interest rate.
- Withdrawal provisions allow flexibility, so you’re able to take out some money without paying penalties, depending on your contract.
- You’re able to purchase a MYGA with nonqualified or qualified funds.
- You can avoid probate and pass the MYGA to beneficiaries at the time of death of the annuitant.
As you can see, MYGAs are a great option if you’re looking to guarantee payouts without worrying about the risks associated with market fluctuations.
Who Should Choose a MYGA Annuity?
Multi-year guaranteed annuities are a great option for those looking for guaranteed income, security, and flexibility when approaching retirement age. They can be especially beneficial to people who want to protect their money from market volatility while still having access to it in the case of an emergency.
Generally speaking, many retirees live off of their savings account, which loses its value over time due to inflation. So for those nearing retirement or already in retirement, a MYGA might be a good fit.
Ultimately, MYGA annuities are best suited for those looking for reliable income streams over multiple years while protecting their funds from market risks and taking advantage of tax benefits along the way. If you’re looking for MYGAs, make the most of your tax advantages while enjoying the high interest rate growth and the flexibility provided by withdrawal provisions.
Contact the ELCO Mutual team today to see what we have to offer. Since 1946, we’ve supported our customers in achieving financial stability so they can enjoy their lives well into retirement. Learn more about our premium deferred annuity options and see how MYGA can help you secure long-term growth.