A simple look at one of the most straightforward types of fixed annuities.
If you’ve been researching ways to earn a predictable interest rate on retirement savings, you may have come across the term MYGA. But what exactly is it, and how does it work?
MYGA stands for Multi-Year Guaranteed Annuity. It is a type of fixed annuity issued by an insurance company that provides a guaranteed interest rate for a specific number of years.
In some ways, the concept may feel familiar to people who have used certificates of deposit (CDs): you commit money for a certain period of time in exchange for a stated interest rate. But MYGAs and CDs are different financial products, with different features, protections, and tax treatment.
When you purchase a MYGA, you choose a guaranteed term—commonly 3, 5, 7, or sometimes 10 years, depending on the insurance company and product.
The insurance company then guarantees a stated interest rate for that period.
For example, if you place $100,000 into a 5-year MYGA, interest is credited according to the terms of the contract throughout that five-year period.
Unlike investments whose values fluctuate with the stock market, a traditional MYGA’s credited interest rate does not change simply because the stock market rises or falls.
That predictability is one reason some people consider MYGAs for a portion of their retirement savings.
One feature that distinguishes annuities from many bank products is tax deferral.
With a non-qualified MYGA, interest generally grows tax-deferred while it remains inside the annuity. This means you typically do not pay income taxes on those earnings until they are withdrawn.
Tax treatment is different when an annuity is held within an IRA or another qualified retirement account because those accounts already receive tax-deferred treatment.
Usually, yes—but this is an important part of the contract to understand before purchasing a MYGA.
Many MYGAs allow a certain amount to be withdrawn each year without a surrender charge. Withdrawals beyond the amount permitted by the contract during the surrender period may result in a surrender charge and, with some contracts, a market value adjustment.
Withdrawals may also have tax consequences, and distributions made before age 59½ may be subject to an additional federal tax penalty.
For that reason, a MYGA is generally better suited for money you do not expect to need for near-term expenses.
When the guaranteed term ends, you generally have several options depending on the contract.
You may be able to renew the annuity, withdraw the funds, move the money to another annuity through a tax-free exchange when eligible, or choose another option offered by the insurance company.
The important thing is not to ignore the end of the guaranteed period. Reviewing your options before the term ends gives you time to decide what makes sense for your circumstances.
No. Although MYGAs and CDs can have some similarities, they are fundamentally different products.
A CD is a deposit product offered by a bank or credit union. A MYGA is an insurance contract issued by a life insurance company.
Bank CDs may qualify for FDIC insurance when held at an FDIC-insured institution and within applicable limits. MYGAs are not FDIC insured. An annuity’s contractual guarantees are backed by the claims-paying ability of the issuing insurance company. State guaranty associations may also provide certain protections, subject to applicable limits and rules.
MYGAs and CDs can also differ in their tax treatment, withdrawal provisions, surrender periods, available terms, and other contract features.
People may consider a MYGA when they are looking for a combination of:
A MYGA is not appropriate for every person or every dollar of retirement savings. Liquidity needs, time horizon, tax considerations, contract provisions, and the financial strength of the issuing insurance company should all be considered.
A MYGA can be a relatively straightforward retirement accumulation tool: you place money with an insurance company, receive a guaranteed interest rate for a specified period, and allow the interest to accumulate according to the terms of the contract.
The key is understanding exactly what you are buying—including the guaranteed period, interest-crediting terms, withdrawal provisions, surrender charges, renewal provisions, and the insurance company standing behind the guarantees.
At CDA of America, we believe understanding your options is an important part of making informed retirement decisions. Taking the time to compare products, rates, features, and your own liquidity needs can help you determine whether a MYGA deserves a place in your retirement strategy.
Want to see how a guaranteed interest rate could affect your savings over time? Use our Fixed Annuity Calculator to explore different amounts, rates, and terms.