MYGA vs Fixed Annuity
Today we're going to talk about Multi-Year Guarantee Annuities versus Fixed Annuities. MYGAs, Multi-Year Guaranteed Annuities versus Fixed Annuities. What you're going to find out today is a Multi-YearGuarantee Annuity instead of just a Fixed Annuity, or are they the same thing? Hang in there with me. This is going to be interesting.
Boy, we have a lot to cover today on Multi-YearGuarantee Annuities and Fixed Annuities. First of all, we're going to discuss whether a Multi-YearGuarantee Annuity is a Fixed Annuity? What is a Multi-YearGuarantee Annuity? We're also going to talk about what Multi-YearGuarantee Annuity solves for and the other types of what's called Fixed Annuities. There are all kinds of Fixed Annuity, so when you hear people say I hate all annuities, it's like saying I wouldn't say I like all restaurants, or I wouldn't say I like all shoes. It's crazy. It's uninformed. It's misleading. We're going to talk about all Fixed Annuities, and then we're going to go over the benefits and the limitations of Fixed Annuities, Multi-YearGuarantee Annuities.
What Is a MYGA?
What is a Multi-YearGuarantee Annuity? It's a Fixed Rate Annuity. It's like a CD. It's the annuity industry's version of a CD. What is a CD? You're probably familiar with that. You give the bank or brokers firm some money, and they guarantee an interest rate for a specific period of time, like a one-year CD or three-year CD. Multi-Year Guarantee Annuities and Fixed Rate Annuities are the same principles. You give the insurance company money, and they guarantee you a specific interest rate for a specific period of time. The difference primarily is with the CD and a non-IRA account; you have to pay taxes on the interest every year. With interest on a Multi-Year Guarantee Annuity in a non-IRA account, it compounds tax-deferred. Multi-Year Guarantee Annuity solves for principal protection; it's your safe money. CDs, money markets, AAA, AAA municipal bonds, and treasuries.
It's where you don't want to lose a penny. It's where you don't want the markets to mess with your principle. You want to protect that principle, you want to get an interest rate.
Then you have the Fixed Rate Annuities, Multi-Year Guaranteed Annuities. It's where you don't want to lose a penny. It's where you don't want the markets to mess with your principle. You want to protect that principle and get an interest rate. With Multi-Year Guarantee Annuities, most of them allow you to peel off interests, but some of them don't. If you don't need the interest to come out, you can choose one with a high guarantee for that specific period. Or if you say, "Hey, I want the guarantee, but I also want to peel off that interest every month." We can find those for you as well.
Let's briefly talk about Fixed Annuities just as a category because once again, people say, "I hate all annuities." Come on. It's like saying I hate all restaurants; you can't say that. Fixed Annuities could mean Multi-Year Guarantee Annuities. Other types, the primary types of Fixed Annuities would be Fixed Indexed Annuities, would also be Qualified Longevity Annuity Contracts, Deferred Income Annuities, a Single Premium Immediate Annuities. When you say Fixed Annuity, it's a pretty broad topic. Some solve for income, some solve for principal protection. But what we're talking about primarily today is principle protection using a Fixed Rate annuity, also called a Multi-Year Guaranteed Annuity.
All right, one of the benefits of Multi-Year Guarantee Annuity is Fixed Rate Annuities, principal protection. The market is not going to disrupt the principle. You could peel off interests with some of them. Some with care, or they're guaranteed. Inside an IRA, it's a guaranteed interest rate, just like a CD would be outside of an IRA. The interest grows and compounds tax-deferred. With CDs, you'd have to pay taxes on that annual interest. But both are perfect products for principal protection. But CD is Multi-Year Guarantee Annuities, are safe money products. Both work in your portfolio. One is not better than the other; it's just you shop all of them for the highest contractual guaranteed rate for the specific terms.
If you're saying I need a three-year guarantee, shop both CDs and Multi-Year Guarantee Annuities and choose the one that fits best for your situation and what account you're using it in. Typically, Multi-Year Guaranteed Annuity rates are higher than a certificate of deposit CD rates, three years and out. Three years and then CDs are competitive and sometimes beat Multi-Year Guarantee Annuities. But three years and out Multi-Year Guarantee Annuities provide the highest contractual guarantee; you have to buy one. But if you're looking for the highest contractual guarantee, those are the parameters that I look at. Also, remember, just like CDs, Multi-Year Guarantee Annuities have no annual fees, and you combine an IRA or non-IRA account. You could hold them in a Roth account as well.
Finally, one of the benefits that I love with Multi-Year Guarantee Annuities, which can also be used with CD certificates of deposit, is laddering. In other words, if you had a set amount of money, let's say you had $120,000 and you said, "You know what, Stan, I don't know where interest rates are going, but I don't want to lock in too long over the term, and if they move, I want to have money coming due." Here's the way to ladder that. With a 120,000, instead of trying to be a genius and think you know where rates are going because none of us know. You take $40,000 and buy a three-year MYGA, Multi-Year Guarantee Annuity, $40,000 and buy a four-year Multi Guarantee Annuity, and $40,000 and buy a five-year. What's happened there? You've laddered the durations, meaning that you're going to have money coming due starting in year three. Hopefully, we can transfer that Multi-Year Guaranteed Annuity to a higher rate.
Also, remember that with Multi-Year Guarantee Annuities, you can transfer from one to the other without creating any tax consequences. Let's talk a little bit more about laddering. I had a gentleman call me the other day, and he said, "You know what? I want to do a ladder, one year all the way out to seven years." What we did is we shopped all rates on my site stantheannuityman.com for MYGAs, and I told him to go to bankrate.com, which has the best place to shop for CDs nationally. What did he end up doing? He ended up buying a one-year CD, a two-year CD, and a three-year CD.
Then he bought a 4, 5, and 7-year MYGA, so he had laddered across the board, had money coming due starting in year 1, and he got the highest contractual guarantees with the product. The CDs had some higher contractual guarantees at the low end of the duration, and then the MYGAs had the high-end of duration, the Multi-Year Guaranteed Annuities. That's the way to ladder using CDs and Multi-Year Guaranteed Annuities, pretty much's the same product.
Let's talk about the limitations of Multi-Year Guarantee Annuities. First of all, not all carriers offer them. Some do, some don't. On stantheannuityman.com, pull up the live MYGA feed that we have. If you put in your state and the duration, you'll see what's approved in your state. Also, the surrender charges are very high. Let's say, for example, you bought a five-year Multi-Year Guaranteed Annuity, and you wanted to cash it out in year 3. It's going to be a pretty high surrender charge to get out. They'll understand that there are no surrender charges if you hold that Multi-Year Guarantee Annuity to the end of the term. Still, they have to charge those high surrender charges to lock-in that guarantee, to guarantee that amount of money contractually.
Another limitation, even though it's a benefit is, in a non-IRA account, Multi-Year Guaranteed Annuity interest grows tax-deferred. Still, the limitation coming back is, you and I both know the IRS; they're eventually going to tap you on the shoulder and say, "Hey, need those taxes." When you take money out of a Multi-Year Guaranteed Annuity, they're going to be taxed. Those gains are going to be taxed first, so last-in-first-out. That money taken out is taxed at ordinary income levels.
Remember, Multi-Year Guarantee Annuities and Fixed Rate Annuities, all types are regulated at the state level, so all states will approve Multi-Year Guarantee and annuities that might not be approved in other states.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.