Multi-year guaranteed annuities (MYGAs) are a type of insurance contract that guarantees a source of future income and offers a guaranteed interest rate for a specific number of years. MYGAs are a relatively low-risk type of annuity because of the guarantees and shelter from market volatility.
What is a multi-year guaranteed annuity (MYGA)?
A MYGA is a type of fixed deferred annuity, which means it belongs to a class of annuities that guarantee a steady income stream and a predetermined rate of interest set by the insurer. Your interest rate will be guaranteed for a specific number of years — usually up to 10.
How do multi-year guaranteed annuities work?
Unlike other types of fixed annuities, multi-year guaranteed annuities (MYGAs) give you a set interest rate for multiple years, as opposed to having your insurer set a fixed rate on an annual basis or similar time frame. In a 2020 research report by Milliman, the average net earned interest rate for MYGAs with a five-year guarantee period was 3.78%. [1]
Because of the fixed interest rate, multi-year guaranteed annuities are often compared to certificates of deposit (CDs). But unlike CDs, you won’t have to pay taxes on the interest earned year to year — MYGAs are tax-deferred, meaning you’ll only pay taxes when you begin to receive payments from your annuity. [2]
Like other annuities, you’ll fund your contract during the so-called accumulation phase. When you elect to start receiving payments from your annuity, you’ll enter the so-called annuitization phase.
Premiums
Often, multi-year guaranteed annuities are funded with a lump sum, but you can also elect to pay into your contract on a monthly or annual basis.
Some insurance companies may have a minimum or maximum limit on single premiums, so you can double-check your contract with the agent you’re working with before paying. Your principal will then gain interest at the rate set by your insurer.
Accumulation period
The accumulation period is when you fund your annuity and your principal grows. In other words, this is when your annuity will gain interest. Before buying, you should read your contract carefully to learn how much interest you’ll earn and for how many years your rate is guaranteed.
During this time, you typically can’t make withdrawals without paying a penalty fee, but some insurers may allow annual withdrawals up to a certain limit — for example, 10%. You’ll need to check your specific contract with your insurer.
Annuitization or payout phase
When your guaranteed period is over, you can usually choose to either roll over your funds into a new MYGA, or choose a settlement option, which means you’ll start to receive funds from your annuity.
This process is also called annuitization, or the payout phase. You’ll be able to choose how often you’d like to receive payments (usually monthly or annually), and the payment amount will be fixed.
Surrender period & fees
The surrender period is the length of time after you buy your annuity during which you’d pay a penalty fee for withdrawing funds. Some MYGAs allow you to withdraw up to a certain percentage of your funds without paying a fee, but you’ll need to check the exact terms of your contract with your insurer. Surrender charges can vary widely across different types of annuity contracts.
Tax implications
You won’t pay taxes until you start taking income from your annuity. It’s possible to buy a MYGA with pre-tax or post-tax dollars — each option will affect your taxes differently.
If you bought your MYGA with post-tax dollars (also called non-qualified funds), you’ll only pay taxes on the interest you earned. You won’t pay taxes on the principal. Non-qualified annuities can be funded with savings, the proceeds from the sale of a large asset, or even funds from a windfall.
Learn more about non-qualified annuities
If you bought your MYGA with pre-tax dollars (also called qualified funds) you’ll pay taxes on both the principal and interest. Common examples of qualified funds include money from a 401(k) plan or IRA.
Learn more about qualified annuities
Plus, since MYGAs are tax-deferred, you may pay an additional 10% tax penalty if you make a withdrawal before age 59 ½. [3] This is the case even if your insurer allows you to withdraw up to a certain percentage of your account value without a surrender fee.
Learn more about other types of annuities
What happens when the guaranteed period of your MYGA ends?
When your guaranteed period ends, you have a few options — including renewal, buying a new annuity contact, or receiving payments.
Renew your contract. Some insurers let you roll over your accumulated value into a renewed MYGA contract. This option will usually come with different interest rates and terms than before, so you’ll need to review the changes carefully.
Withdraw your funds and buy a new contract. You can also withdraw your money and roll it over into a new MYGA. Here, you’d also have new interest rates and terms to your contract, since it’s an entirely new one and you could switch insurers.
Start receiving payments. If you’re ready for an additional income stream, you can elect to annuitize, which is when you receive payments from your annuity contract.
What are the pros & cons of MYGAs?
Multi-year guaranteed annuities offer you a reliable way to earn a modest amount of interest, and you don’t risk exposing your funds to any market volatility. Just like with any financial product, though, it’s important to review the pros and cons before adding a MYGA into your financial plan.
“MYGAs usually offer rates of interest that are higher than rates of interest on CDs. That’s the main benefit,” says Andy Panko, certified financial planner, retirement income certified professional, and owner of Tenon Financial.
Pros
Guaranteed fixed rate. With a multi-year guaranteed annuity, you know how much interest you’ll earn for certain, and that won’t change year over year.
Guaranteed income. As a type of fixed annuity, MYGAs offer you a reliable income stream in the future that can help you cover expenses later in life.
Tax deferral. Like other annuities, you won’t pay taxes on your earned interest until you start to withdraw money. You can plan for exactly when you’ll need to pay taxes.
Cons
Lower potential for gains than other investments. You might earn less in interest with a MYGA than you would with an indexed or variable annuity.
Not FDIC insured. MYGAs are often compared to CDs, which are FDIC-insured. MYGAs and other annuities are insured only by the insurance company selling them, so it’s important to buy from a reputable insurer with a strong financial record. [4]
Fees. As with other types of annuities, MYGAs can come with administration fees, surrender charges, and other administrative costs on behalf of the insurer that can significantly reduce the amount of the payments you receive.
What should you consider before buying a multi-year guaranteed annuity?
Multi-year guaranteed annuities provide a low-risk way to grow your principal without exposing your funds to market fluctuations. If you’re looking to buy a multi-year guaranteed annuity, you can compare offerings from different insurers to select an interest rate that works and a guaranteed rate period that aligns with your goals.
Here are a few more factors to consider before adding a MYGA to your financial plan.
Age
MYGAs are usually deferred annuities, which means you don’t receive an income stream right away. If you’re at an age where you need an income stream within a year, you may want to consider a different type of immediate annuity. But if you have up to 10 years before you’d need income, a multi-year guaranteed annuity could fill that need.
Your investment goals
Multi-year guaranteed annuities could work for you if you want to grow your money with a predictable investment vehicle in order to supplement your income stream down the line.
Your risk tolerance
If you don’t want to expose your funds to market volatility, a MYGA could be a viable option for you. This is a low-risk investment because the rates are guaranteed and not subject to market fluctuations.
If you have a high risk tolerance and want the potential to earn more based on the performance of the market, you might consider another type of annuity, like an indexed or variable annuity.
Who should consider a multi-year guaranteed annuity?
“If people are looking to earn a guaranteed rate of interest for a certain period of time and want complete principal protection of their money [...] a multi-year guaranteed annuity could be a good consideration,” says Panko of Tenon Financial.
Generally speaking, the type of annuity that’s right for you depends on your personal financial situation, as well as the factors listed above, so speaking with a financial advisor can help you determine which steps to take for your personal financial plan.
