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What Is a Multi-Year Guaranteed Annuity (MYGA)?

What Is a Multi-Year Guaranteed Annuity (MYGA)?

April 22, 2022

Get a guaranteed interest rate with this tax-deferred investment strategy.

Multi-year Guaranteed Annuities (MYGAs) are fixed annuities that promise a set rate of return for a period of years. When the time is up, you can either cash in the accumulated value or roll it over into a new MYGA tax-free if you don’t yet need the funds.

MYGAs are sometimes called CD-type annuities because they are structured similarly to bank Certificates of Deposit (CDs). Both products offer compounding interest at a guaranteed rate for a number of years. They are considered low-risk, as your principal is protected from any market downturn. If you have designated a beneficiary, both can bypass probate and transfer directly to that beneficiary on your death.

In the unlikely event that your provider became unable to fulfill your contract, both types of investment are guaranteed up to a certain amount. A MYGA is covered by the State Insurance Guarantee Association (SIGA) for the state in which the contract was issued. The amount of this coverage varies by state, but typically ranges between $100,000 and $500,000 per contract. A CD issued by a traditional bank is backed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account.

But MYGAs and CDs have key differences tax-wise. MYGAs are considered a retirement vehicle by the IRS, so whether they are funded with pre-tax or after-tax dollars, they offer tax-deferred growth and are only taxed as the money is distributed. CD income, in comparison, is taxed every year.

Early withdrawal from a CD will require cashing in the entire CD early and forfeiting all earnings to date. In contrast, many MYGA contracts offer the option to withdraw an amount equal to the interest earned, or a certain percentage of the contributed amount, every year without penalty. However, MYGA earnings taken as income before the age of 59 1/2 will incur a 10% IRS early withdrawal penalty. MYGAs are therefore best used as part of a retirement plan.

A MYGA has another advantage over a CD for those looking to finance their retirement: it can include an option to be paid out in the form of a lifetime regular income stream, providing a secure retirement income and the peace of mind that comes with it.