What Is a MYGA Annuity and How Does It Work?

Annuities serve as financial tools designed to provide a steady income stream, often utilized for retirement planning. They represent a contract between an individual and an insurance company, where premiums are paid in exchange for future regular disbursements. These financial products offer a method to accumulate savings over time and then convert those savings into a predictable flow of payments, addressing concerns about outliving one’s financial resources. Many individuals consider annuities as a component of their broader retirement strategy, supplementing other income sources like Social Security or pension benefits.

What is a MYGA Annuity?

A Multi-Year Guaranteed Annuity, or MYGA, is a specific type of fixed annuity. The term MYGA explicitly indicates its core characteristic: a guaranteed fixed interest rate that remains constant for a predetermined number of years. This stands in contrast to other annuity types where interest rates might fluctuate or be tied to market performance.

A MYGA functions similarly to a certificate of deposit (CD) in its predictability, but it is an insurance contract issued by an insurance company, not a bank product. It offers a secure growth environment for savings, as the principal investment is protected from market downturns. Unlike some other fixed annuities that might reset their guaranteed rate annually, a MYGA locks in the rate for the entire multi-year term, which commonly ranges from three to ten years.

How MYGA Annuities Work

Purchasing a MYGA typically involves making a single lump-sum premium payment to an insurance company. This initial deposit then begins to earn interest at the fixed rate specified in the contract. The interest compounds over the guaranteed term, allowing the accumulated value to grow steadily. A significant feature of MYGAs, like other deferred annuities, is their tax-deferred growth. This means that the interest earned on the premium is not subject to income tax until funds are withdrawn from the annuity.

While funds are generally intended for long-term growth, most MYGA contracts include provisions for accessing money during the term. Many policies permit annual penalty-free withdrawals of a certain percentage, often around 10% of the account value, even within the surrender charge period. If withdrawals exceed this specified limit or occur before age 59½, they may be subject to surrender charges from the insurer and potentially a 10% federal income tax penalty from the IRS on the taxable portion.

At the conclusion of the guaranteed interest rate period, the annuity holder has several options. They can choose to renew the contract for another term, often at a new prevailing interest rate offered by the insurance company. Alternatively, they may roll over the funds into a different annuity product, potentially utilizing a tax-free 1035 exchange to defer taxation. Other options include annuitizing the contract to receive a stream of periodic income payments or taking the accumulated value as a lump sum.

Key Features of MYGA Annuities

Multi-Year Guaranteed Annuities come with specific contractual terms that define their operation and provide certain protections.

Surrender charge

One such feature is the surrender charge, which is a fee assessed if funds are withdrawn from the annuity in excess of allowed amounts before the end of a specified period. These charges exist to discourage early withdrawals, as annuities are designed as long-term savings vehicles. Surrender charge schedules typically decline over the contract’s term. For example, a contract might have an 8% charge in the first year, decreasing annually until it reaches 0% after a period of several years, commonly ranging from three to ten years. The exact percentage and duration vary by insurer and contract.

Free withdrawal provisions

Alongside surrender charges, most MYGAs include free withdrawal provisions. These allow the annuity owner to withdraw a limited percentage of the account value each year without incurring surrender charges. This percentage is frequently set at 10% of the contract’s value, providing a degree of liquidity for unexpected needs. Funds withdrawn under this provision are still subject to ordinary income tax on any gains, and an additional 10% federal tax penalty may apply if the withdrawal is made before age 59½.

Guaranteed interest rate period

The guaranteed interest rate period is a defining characteristic of a MYGA. This is the specific timeframe, such as three, five, or seven years, during which the fixed interest rate is locked in and will not change. This ensures predictable growth for the duration of the chosen term. Once this period concludes, the insurer will offer a new rate for renewal, which may be higher or lower than the original rate depending on market conditions.

Principal guarantee

A core benefit of MYGAs is the principal guarantee. This feature ensures that the initial premium invested in the annuity is protected from market fluctuations and will not decrease due to adverse market performance. This provides a layer of security, making MYGAs a suitable option for those with a lower risk tolerance who prioritize the safety of their initial investment.