Over the past year, interest rates have steadily declined, prompting savers to search for high-interest savings vehicles that protect their money from market risk. While high-yield savings accounts and certificates of deposit continue to be popular options, they are not the only way to earn competitive returns.
Multi-year guaranteed annuities are attracting attention as an alternative that can offer competitive yields and predictable growth. Learn more about how these products work and whether they’re right for you.
A multi-year guaranteed annuity, often referred to as a “MYGA”, is a fixed annuity offered by insurance companies. Investors deposit money in MYGA and receive a fixed rate for the term.
MYGAs are often compared to certificates of deposit (CDs) because both are locked in price for a certain period of time. However, it is important to understand that MYGAs are contracts with insurance companies, not bank accounts.
Here’s how it works: You deposit a sum of money with the insurance company, and in return, you receive a fixed interest rate for the entire contract period – also known as the “accumulation phase”. It usually lasts from three to 10 years.
Taxes on the interest earned are deferred until you withdraw, allowing your returns to compound faster than a traditional savings account. However, withdrawals are usually limited to the deposit period; Most MYGAs allow you to withdraw a small portion each year (about 10% of the balance) without penalty, but larger withdrawals may trigger 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 series of income payments. Note, however, that withdrawals from an annuity may result in a tax penalty if you are under age 59½.
Note that annuities are not backed by the FDIC like other savings vehicles, but they are guaranteed by insurance.
Today’s best MYGA rates can be very attractive, especially when compared to CDs and time 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 ratings vary widely across providers, it’s important to compare multiple insurance policies and contract terms before choosing a policy.
Opening MYGA is very simple. Generally, this involves doing some comparison research across insurance providers to find the best rate and term. Be sure to consider the insurer’s credit rating when comparing MYGAs, which can tell you a little more about the company’s customer experience, financial stability, and reliability.
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 after-tax dollars from a tax-advantaged retirement account (known as qualified funds) or from a bank account or other personal funds (known as non-qualified funds).
The minimum amount to open a MYGA usually starts around $5,000, but in some cases can be as high as $50,000 to $100,000 or even higher.
The money in your MYGA will compound over time; When you’re near the end of the term, you can choose to receive an annuity, roll your money into a new annuity, or choose annuity payments.
Note: Early withdrawals may result in a surrender fee equal to a percentage of your account value.
There are some pros and cons to multi-year guaranteed annuities when deciding whether this investment makes sense for you.
The prospect of receiving a fixed interest rate can be attractive to investors who want to protect their savings from market volatility. MYGAs can offer higher rates than traditional savings accounts, and tax-deferred growth.
On the other hand, money held in MYGA is not federally insured. It is guaranteed by the exporter’s insurance company, which can provide some peace of mind. But you can still lose your money if the insurance company goes under.
Other potential downsides that affect your purchasing power over time include limited access to your funds over time, and tax penalties for increasing inflation risks over time.
Read more: How inflation affects savings: Here’s the interest rate you need to beat
Deciding whether MYGA is right for you will require you to have key considerations about your risk tolerance, investment goals, and savings schedule.
MYGAs can offer predictable growth over a period of time without risking your money in the market. For investors with a low risk tolerance, this can be a smart move, especially if you’re investing for the long term and want to pad your income stream later in life.
However, if you are an investor with a risk appetite and you don’t mind exposing yourself to market fluctuations for a big payoff, you may want to consider other investment options.
