If you’re looking for a way to maximize your retirement savings, a MYGA (multi-year guaranteed annuity) could be the key. But if you’re like most of my clients, you’re not sure what an annuity can do for you if you’re not quite ready to retire. Let’s go over some of the most common questions I get about MYGAs and annuities so you can make an informed decision about whether they’re right for you.
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What is a MYGA?
A MYGA is a multi-year guaranteed annuity. Think of it like a CD, except one that’s purchased from an insurance company rather than a bank. It’s the same basic idea: you pay one lump sum that the insurer keeps for a particular term length (3-10 years) and pays you a flat rate of interest guaranteed for the length of your term. MYGAs work really well for money you don’t need to access in the near future – it helps you earn extra interest while that money waits to be used. Current MYGA interest rates are higher than bank CDs.
How much money can I put into a MYGA?
As much as you want, usually – every insurance company has their own rules with minimums and maximums. But the range is usually very broad, from a few thousand dollars up to a few million. If you have a very low or very high amount of money in mind, get in touch and I can search for providers who work with those amounts. But if you’re thinking of using anywhere from $10,000 up to $1,000,000, you’ll have a very wide range of options.
Are there any annual fees?
No. MYGAs are fixed-rate annuities that have no annual fees. Other types of annuities – such as variable or indexed annuities – will likely have fees. But MYGAs are simple, without the fluctuating rate or market tie-ins that those more complicated annuities have. They’re easy to understand and easy to use to boost your retirement savings.
Can I access that money during my annuity’s term?
Yes. Most insurers allow you to access up to 10% of your money yearly with zero penalty. Others will allow you to pull out the interest earned on your capital. It all depends on the specific annuity and insurer you choose. If liquidity is important to you, let me know and I’ll only search for annuities with zero-penalty liquidity features.
What happens when my term ends?
You have several options when your MYGA term ends:
- Renew your contract with a new rate. Your insurer will offer you a new contract with an updated interest rate. If you like that rate and don’t need the money, renewing can be a smart way to keep growing your money with compounding interest.
- Roll over your money into a different MYGA. If you don’t need that money but find a better rate elsewhere, you can roll over that money into a MYGA or other annuity with a different insurer. You will not be taxed on your gains if you choose this option. We’ll just need to do the paperwork to get the money transferred, and you’ll be all set with the new company’s better rate.
- Withdraw all your money. If there’s another use for that money, you can pull it all out at the completion of your term, complete with all your interest gains. If you choose this option, you’ll owe income tax on your total interest gains for that tax year.
- Annuitize your money to create an income stream. Ready to retire? You can convert your lump sum into an income stream by letting the insurer annuitize your money. This is what annuities were designed to do: provide an income stream for the rest of your life that you can’t outlive. The insurer will portion out that money into monthly payments made as long as you live. If you choose this option, you will only owe tax on the portion of interest you receive in that tax year.
What about taxes?
MYGAs offer tax advantages that CDs and savings accounts can’t. The biggest benefit is tax-deferred growth. With a MYGA, your insurer credits your account with interest on a periodic basis. That money compounds over time, growing faster because it’s not taxed yet. You will only be taxed on your gains when you start withdrawing money from your annuity.
Compare that to a CD, where gains are taxed annually. That means you’re always having to report and pay tax on the interest earned by your deposit. Every single tax year means another statement, another chunk of tax due.
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What happens if I need all the money before my term is up?
If you need to pull all the money out, you can do so, but you’ll have to pay the insurance company’s surrender fee. This is a penalty the insurer charges for withdrawing funds over the stated allowed amount before the annuity term is over. The earlier in the term you do this, the higher a surrender fee you’ll pay. Early in your contract, that fee will likely be around 10%, dropping to a single-digit percentage as the contract nears completion. Every insurer will set their own rules and surrender fees, so pay attention to these while you’re shopping around for annuities.
If you need the money due to an emergency – medical expenses, for example – your insurer may allow you to pull more than the stated yearly allowance. It all depends on the specific insurer you choose and their regulations.
Is my money insured by the government, like it would be in a CD?
Any bank-issued product, like a CD, will come backed with the federal government’s deposit insurance up to a maximum of $250,000. If the bank you put your money in collapses, the government will return your money up to that $250,000 maximum.
MYGAs are not issued by banks, but they have a different form of consumer protection. Individual states have their own guaranty funds to protect consumers if an insurance company should fail. Your state’s insurance guaranty association should post the amount they protect per consumer on their website; it’s usually several hundred thousand dollars.
It’s always a good idea to ask your agent or do a little homework regarding an insurance company’s financial ratings. Although it’s unlikely that one would fail, you can rest easier when you see solid financial ratings of A or A+ combined with decades or even hundreds of years of service.
What happens if I die?
Your beneficiary(ies) will get the money (plus interest earnings) if you pass away. Some insurers will let your spouse take over the policy, if he or she is named as your primary beneficiary. That means they can continue the contract if they want, instead of beginning a withdrawal. Most insurers will give your beneficiaries the choice of withdrawing your cash all at once in a lump sum, or of annuitizing it and receiving serial payments. No matter what the options are, it’s important that you name primary and secondary beneficiaries when you buy the annuity and keep them updated as need be. An extra bonus for those beneficiaries? Annuities, like life insurance, are not subject to probate. They’ll get the cash with zero delay from court proceedings.
I’m pretty far from retirement. Should I still get a MYGA?
That depends! It’s true that MYGAs work best for people closer to retirement. Because annuities are retirement products, they are subject to the IRS penalty of 10% if you withdraw any of your gains from the annuity before age 59 ½. Consider how far you are from that age, and how long of an annuity term you’re thinking of. If you’re in your 30s or 40s, make sure you won’t need that money until at least age 59 ½. If you can safely live without that money, a MYGA is a great place to store it avoid stock market turbulence and lock in the highest possible interest rates in the meantime.
So I give the insurance company money now, and they give me back even more money later. How does the insurance company make money?
It’s not a trick, if that’s what you’re worried about. Insurance companies have enormous financial portfolios invested mostly in safe things like bonds. These companies estimate how much they’re likely to need to pay out to their policyholders, and ensure their investments cover that cost, with some left over.
In reality, insurance companies are unlikely to have to pay out on all their policyholders’ behalf. Remember, annuities are sold by life insurance companies. Many life insurance customers buy term insurance, and live out their terms, requiring zero payout from the insurance company.
With an annuity, the insurer knows they’re going to have to pay that money back out, and it’s built into their budget calculations. What they get from you is the influx of cash that allows them to invest even more, earning them higher interest and bigger returns. That’s how they can afford to take your lump sum, hold it for a set number of years, and return it to you with interest. They’re using your money to earn themselves more money during the time period they hold it.
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Always consult your accounting, legal, and tax advisors before implementing any recommendations. This material does not constitute tax, legal, or accounting advice.