Over the past year, interest rates have steadily declined, prompting savers to look for high-interest savings vehicles that protect their money from market risk. While high-yield savings accounts and certificates of deposit remain popular options, they are not the only way to ensure competitive returns.
Multi-year guaranteed annuities have been gaining attention as an alternative that can offer competitive returns and predictable growth. Learn more about how these products work and if they are right for you.
A multi-year guaranteed annuity, often called a “MYGA,” is a fixed annuity offered by insurance companies. Investors deposit money into a MYGA and earn a fixed rate for the term.
MYGAs are often compared to certificates of deposit (CDs) because they both lock in a rate for a fixed term. However, it is important to understand that MYGAs are contracts with insurance companies, not bank accounts.
Here’s how it works: You deposit a lump sum with the insurance company and, in return, earn a fixed interest rate for the entire term of the contract, also known as the “accumulation phase.” This usually lasts three to 10 years.
Taxes on accrued interest are deferred until you make a withdrawal, allowing your returns to compound faster than a traditional deposit account. However, withdrawals are usually limited during the accumulation period; Most MYGAs allow you to withdraw a small portion each year (about 10% of the balance) without penalty, but larger withdrawals may incur surrender charges.
When the contract term ends, you can generally withdraw the funds, roll them over to another annuity, or convert the balance into a stream of income payments. However, keep in mind that withdrawing money from an annuity can result in tax penalties if you are under age 59½.
Please note that annuities are not backed by the FDIC like other savings vehicles, but are guaranteed by the insurer.
Today’s best MYGA rates can be quite attractive, especially compared to CDs and similar term deposit accounts. Longer contracts sometimes offer higher yields, with some products advertising rates above 7% for 10-year terms, although these often come from insurers with lower financial strength ratings.
Because rates and financial qualifications vary widely between providers, it is important to compare various insurers and contract terms before choosing a policy.
Opening a MYGA is quite simple. It usually involves comparative research between insurance providers to find the best rate and term. Be sure to consider the insurer’s credit rating when comparing MYGA, which can tell you a little more about the customer experience, financial stability and reliability of the company.
Read more: Is your bank financially sound? Here’s how to find out.
Once you have selected MYGA, you will need to submit an application online or with a licensed insurance agent. Once you’re approved, you’ll fund your MYGA by transferring pre-tax dollars from a tax-advantaged retirement account (known as qualified funds) or after-tax dollars from a bank account or other personal funds (known as non-qualified funds).
The minimum amount needed to open a MYGA usually starts around $5,000, but can reach $50,000 to $100,000 or even more in some cases.
The money in your MYGA will be compounded over the term; When you near the end of the term, you can choose to take a payment, roll your money into a new annuity, or opt for income annuity payments.
Remember: making an early withdrawal may incur a surrender charge equal to a percentage of your account value.
There are some pros and cons of multi-year guaranteed annuities that should be considered when deciding if these investments make sense for you.
The predictability of earning a fixed interest rate can be attractive to investors who want to protect their savings from market volatility. MYGAs can also offer higher rates than traditional deposit accounts, plus tax-deferred growth.
On the other hand, money held in a MYGA is not federally insured. It is guaranteed by the issuing insurance company, which can provide some peace of mind. But you could still end up losing your money if the insurance company goes bankrupt.
Other potential disadvantages include tax penalties for early withdrawals, limited access to your funds during the term, and the risk that rising inflation will affect the purchasing power of your money over time.
Read more: How inflation affects savings: here is the interest rate you must exceed
To decide if a MYGA is right for you, you’ll need to make key considerations about your risk tolerance, investment goals, and savings schedule.
MYGAs can offer predictable growth over a set period of time without risking your money in the market. For investors with low risk tolerance, this can be a smart move, especially if they invest for the long term and want to increase their income stream in the future.
However, if you are an investor with an appetite for risk and do not mind exposing yourself to market swings to obtain greater profits, you could consider other investment options.