So what is a MYGA and how does it work? The short answer is that if you know how a CDs (Certificates of Deposit) work, then you pretty much have the gist of a Multi-Year Guarantee Annuity (MYGA). It’s important to know the details of MYGAs so you can determine if they might fit into your specific principal protection goals.
Both CDs and MYGAs offer full principal protection while providing a contractually guaranteed annual interest rate for a specific period of time that you choose. Below are some of the contractual characteristics that CDs and MYGAs share.
MYGAs are a specific type of fixed annuity and are issued by life insurance companies, while CDs are typically issued by banks. Both CDs and MYGAs have surrender charges during the contracted term, but the general rule is that most will allow you to peel off the earned interest without penalty.
There are only 2 primary differences between MYGAs and CDs.
Neither of those two distinctions make one product better than the other. In my opinion, FDIC insured coverage for CDs is superior to State Guaranty Fund coverage for MYGAs. FDIC is backed by the federal government and its full claims paying ability and taxation powers. MYGAs should be primarily owned for the claims paying ability of the issuing carrier, not the State Guaranty Fund backing.
Instead of trying to figure out which strategy is better, you should be looking at how they work together. For an efficient fixed rate ladder, I would recommend combining both CDs and MYGAs in order to maximize the best rates for specific durations.
CDs typically have the highest fixed rates if your time frame is shorter than one year and up to 2 ½ years. MYGAs traditionally offer the best fixed rates if your time frame is 3 years or more. So a good fixed rate ladder might look like this, using $300,000 as a lump sum example.
This ladder would have money maturing in laddered intervals (length of time) so that you can hopefully move those assets to a higher rate and continue the laddering strategy. You can peel off the interest (penalty free partial withdrawals) if needed, or just let the money contractually grow.
CDs and MYGAs can be used in all types of accounts (Traditional IRAs, Roth IRAs, non-IRAs). The contractual guarantees are the same, but the taxation of the interest will be dependent on the account type.
When using MYGAs in a non-IRA (non-qualified) account, you can transfer a MYGA to another MYGA without tax consequences. The IRS rule that addresses this non-taxable event is found in section 1035 of the IRS code. In the annuity world, this MYGA to MYGA non-taxable move is called a “1035 Transfer.”
Think of a MYGA 1035 exchange/transfer as pushing the tax puck down the ice. You will have to pay taxes on the MYGA money eventually when you take it out of the account, but you can also choose to have that interest grow tax-deferred.
In a world of increasing taxes, having a MYGA strategy that has a guaranteed interest rate that grows tax-deferred is a good thing in my opinion.
When shopping for CDs or MYGAs, it’s important to look at all issuers for the highest contractual yield. Both CDs and MYGAs are commodity products. Not one CD is better than the other, and not one MYGA is better than the other. They are fixed rate instruments, easy to understand, and somewhat interchangeable.
On a side note, most agents and advisors will try and sell you an indexed annuity instead of a MYGA with the promise of “potential” returns. In my opinion, you should never buy potential when you can buy guarantees. Also remember that most products are pushed for the highest paid commission. Too often this is the case for indexed annuities.
Before you purchase a MYGA annuity contract or CD, it’s important to find the best CD feed and MYGA annuity product feed that shops nationwide for the best fixed rates. Do your homework, take your time, and find the best principal protected strategy for your specific situation.
In a world of market volatility, sometimes simple is good for part of your financial plan or retirement income plan.