Annuities are complex financial products that can provide a steady stream of income during retirement. One type of annuity, the multi-year guaranteed annuity (MYGA), offers a fixed interest rate for a specific period, typically ranging from two to ten years. Sales of these annuities were up 48% in 2023. If you’re considering setting up a MYGA, here are 8 things you should know.
1. Understanding the Basics of MYGAs
A multi-year guaranteed annuity is a type of fixed annuity that provides a guaranteed interest rate for a predetermined period. Unlike other annuities, MYGAs have a fixed maturity date, after which you can either renew the contract or withdraw your funds without penalty.
Key Features of MYGAs
- Fixed interest rate for a set period (e.g., 3, 5, or 7 years)
- Principal and interest are guaranteed by the issuing insurance company
- Interest earned is tax-deferred until withdrawal
- Typically, no annual fees or ongoing management charges
2. Determining the Right Term Length
One of the critical decisions when setting up a MYGA is choosing the term length. Longer terms generally offer higher interest rates, but they also lock your money for a more extended period.
Factors to Consider When Choosing a Term Length
- Your age and retirement timeline
- Your liquidity needs during the term
- Your risk tolerance and investment objectives
- Current interest rate environment and future rate expectations
3. Understanding Interest Rates and Crediting Methods
Interest rates are a crucial factor in determining the potential growth of your MYGA investment. It’s essential to understand how interest is calculated and credited to your account.
Common Interest Crediting Methods
- Annual Crediting: Interest is calculated and credited once a year
- Multi-Year Crediting: Interest is calculated and credited at the end of the term
- Portfolio Crediting: Interest is calculated based on the performance of an underlying portfolio
4. Evaluating Surrender Charges and Withdrawal Penalties
MYGAs typically have surrender charges or withdrawal penalties if you withdraw funds before the end of the term. These charges can significantly impact your investment returns, so it’s crucial to understand them before committing.
Factors to Consider Regarding Surrender Charges
- Surrender charge schedule (typically decreasing over time)
- Free withdrawal provisions (if any)
- Exceptions for required minimum distributions (RMDs)
- Tax implications of early withdrawals
5. Assessing the Financial Strength of the Issuing Company
The safety of your MYGA investment depends on the financial strength and claims-paying ability of the issuing insurance company. It’s essential to research and evaluate the company’s ratings and financial stability.
Factors to Consider When Evaluating an Insurance Company
- Financial strength ratings from independent agencies (e.g., A.M. Best, Fitch, Moody’s, S&P)
- Company’s history and track record
- Asset size and diversification
- Regulatory oversight and compliance
6. Understanding Tax Implications and Beneficiary Options
MYGAs offer tax-deferred growth, but withdrawals are subject to ordinary income tax. Additionally, you’ll need to consider beneficiary options and the potential tax implications for your heirs.
Tax and Beneficiary Considerations
- Tax-deferred growth until withdrawal
- Ordinary income tax on withdrawals
- Potential for 10% early withdrawal penalty before age 59½
- Beneficiary options (e.g., lump sum, stretch, or annuitization)
7. Comparing MYGAs with Other Investment Options
While MYGAs offer guaranteed returns and principal protection, it’s essential to compare them with other investment options to determine the best fit for your financial goals and risk tolerance.
Alternative Investment Options to Consider
- Fixed-rate investments (e.g., CDs, bonds)
- Variable annuities
- Mutual funds
- Exchange-traded funds (ETFs)
- Individual stocks and securities
8. Working with a Financial Professional
Setting up a MYGA can be complex, and it’s often advisable to work with a qualified financial professional who can guide you through the process and ensure that your investment aligns with your overall financial plan.
Benefits of Working with a Financial Professional
- Objective advice and guidance
- Comprehensive financial planning
- Access to a wide range of investment products
- Ongoing monitoring and portfolio management
Final Thoughts
By understanding these 8 things about setting up a multi-year guaranteed annuity, you can make an informed decision and potentially benefit from the guaranteed returns and principal protection offered by this investment product.
