senior couple retirement
Free Financial Planning Guidance

Learn about the four primary concerns that define the financial planning process for retirees.financial planning guide


Multi-Year Guaranteed Annuity


A Multi-Year Guarantee Annuity (MYGA), also known as a "Fixed Rate Annuity," is a variation of traditional tax-deferred annuity. Just like all other forms of annuities, MYGA's are offered by a variety of different insurance companies. While similar to traditional deferred annuities in many ways, the MYGA was designed to compete with other savings instruments such as bank CD's and Treasury Bills. Similar to these products, MYGA's offer the annuitant, a guaranteed, fixed rate of interest for a specified period of time, often 1, 2, 3, 5, 7 or 10 years. This rate is fixed for the entire term of the contract.

Tax-Deferred Growth

One of the many competitive advantages that MYGA's offer over bank CD's and Treasury Bills is that interest earnings can grow tax-deferred, meaning that no current tax liability is due on interest earnings until withdrawn. In contrast, holders of bank CD's and Treasury Bills have to pay income tax on interest as it is earned, regardless of whether it is withdrawn or not. This gives the MYGA a distinct advantage if the annuitant wants the certainty of a guaranteed, fixed rate of return, but doesn't need current income.

Liquidity

Like most annuities, MYGA's have early withdrawal penalties known as "surrender charges," however, these types of policies generally offer the annuitant some limited liquidity options when it comes to making withdrawals. For example, should the annuitant need to make a lump sum withdrawal or want to use the MYGA to provide monthly income, he or she can typically withdraw the greater of their interest earned or 10% of the surrender value each year, without penalty.

Fees

Except in rare cases, MYGA's do not charge fees or expenses.

Estate Planning

Annuities, including MYGA's, allow you to name a beneficiary in the event of the annuitant's death. If properly designated, the proceeds of the annuity bypass probate and go directly to the named beneficiary.

Possible Advantages

MYGA's generally have no internal fees and typically pay a higher, guaranteed rate of interest than a bank CD or Treasury Bill; additionally interest earned by a MYGA compounds tax-deferred until withdrawn. Also, with a MYGA strategy, you know exactly what your future annuity value will be, guaranteed, regardless of prevailing interest rates or market conditions.

Possible Disadvantages

Similar to CD's and Treasury Bills, MYGA's do have early surrender penalties if you decide you want all of your money back before the end of the specified term, although many offer flexibility when it comes to making withdrawals. In some instances, MYGA's automatically renew at the end of the specified period unless you notify the insurance company of your intention not to renew. This is merely something to be aware of when purchasing a MYGA.

Summary

Multi-Year Guarantee Annuities can be a great alternative to CD's and Treasury Bills for those with a shorter time horizon, such as 1 to 3 years. They offer tax-deferred interest or can be used to provide income. Annuities can also avoid probate for estate planning purposes.

As with any annuity, it is important to know what you are purchasing, how it works and the terms or restrictions of the contract. To find out more about Multi-Year Guaranteed Annuities, contact us today or speak with your Alliance America Agent Advisor for more information.