What Is a Multi-Year Guaranteed Annuity (MYGA)?

Annuities are financial contracts, typically issued by insurance companies, designed to help individuals accumulate funds and provide income, often for retirement. The Multi-Year Guaranteed Annuity (MYGA) offers predictable growth. This article clarifies MYGA characteristics and operational aspects for those considering their role in a financial plan.

Defining Multi-Year Guaranteed Annuities

A Multi-Year Guaranteed Annuity (MYGA) is a fixed annuity contract with an insurance company. It offers a guaranteed, fixed interest rate for a predetermined period, typically three to ten years. This rate remains constant throughout the chosen term, providing stability and predictability.

MYGAs aim for capital preservation and consistent growth. Unlike variable annuities, MYGAs shield principal from market fluctuations, making them suitable for low-risk accumulation. The “multi-year” aspect refers to the locked-in interest rate duration, and “guaranteed” signifies the insurer’s assurance of that fixed rate for the entire term.

How MYGAs Function

Investing in a MYGA usually starts with a single premium payment, though some contracts allow periodic contributions. The insurance company applies the guaranteed interest rate to the premium and accumulated earnings. This fixed rate is locked in for the entire multi-year period chosen by the owner, ensuring a consistent return.

MYGAs are accumulation vehicles, allowing funds to grow over time. Interest earned grows on a tax-deferred basis, meaning taxes are not due until withdrawals. This allows earnings to compound more efficiently without annual tax erosion, even if held outside a traditional retirement account.

MYGAs typically include provisions for limited liquidity. Most contracts allow penalty-free withdrawals of a certain percentage, often around 10%, of the account value each year. However, exceeding this limit or surrendering the contract early incurs surrender charges. These charges are usually a percentage of the withdrawn amount and often decline over the contract term, ranging from 1% to 10% in early years.

At the conclusion of the guaranteed term, the owner has several options. They can renew the MYGA for a new term at the current interest rate, withdraw funds without surrender charges, or transfer them to another annuity product, potentially via a tax-free 1035 exchange. Some MYGAs also offer converting the accumulated value into a stream of income payments.

Key Aspects When Considering an MYGA

When evaluating a MYGA, align its characteristics with personal financial objectives. MYGAs are often considered by individuals prioritizing capital preservation and predictable growth, making them suitable for conservative portions of a retirement portfolio. Their fixed interest rates remove market volatility, appealing to those who prefer stable returns.

Assess individual liquidity needs, given the MYGA structure. While many contracts permit penalty-free withdrawals of a small percentage annually, substantial early withdrawals beyond this limit can trigger surrender charges. Funds placed in a MYGA are generally intended to remain invested for the full term to avoid penalties. Therefore, ensure sufficient liquid funds are available for unforeseen expenses outside the MYGA.

MYGAs offer tax-deferred growth. Earnings accumulate without annual taxation, allowing the investment to compound more effectively. When withdrawals are made, typically during retirement, the earnings portion is taxed as ordinary income. If purchased with pre-tax (qualified) funds, both principal and earnings are taxed upon withdrawal; if purchased with after-tax (non-qualified) funds, only earnings are taxable.

MYGAs share similarities with Certificates of Deposit (CDs), as both offer guaranteed interest rates for a set period. However, MYGAs are insurance products, while CDs are banking products. MYGAs can sometimes offer higher interest rates than comparable CDs, and their growth is tax-deferred, unlike CD interest which is typically taxed annually unless held in a tax-advantaged account. While CDs are federally insured by the FDIC, MYGAs are backed by the issuing insurance company’s financial strength and are typically covered by state guaranty associations, which have varying coverage limits.

The financial strength of the issuing insurance company is a key consideration. The annuity’s guarantees depend on the insurer’s ability to meet its financial obligations. Independent rating agencies like A.M. Best, Moody’s, Standard & Poor’s (S&P), and Fitch assess insurer financial stability. Reviewing these ratings indicates the insurer’s capacity to honor long-term commitments.