Multi-Year Guaranteed Annuity (MYGA)
Should I Buy a Bank CD or a Superior CD-Like Annuity?
A Multi Year Guarantee Annuity (MYGA) is commonly known in the annuity industry as a “Fixed Rate Annuity” because it pays a specified rate of interest over a specified period of time (typically 2 to 10+ years). This interest rate is covered by the claims ability of the issuing insurance company, and will not change for the life of the contract. At the end of the term, you can take your money and do something else with it, or let it roll into a new annuity period.
Rates on MYGA’s tend to be much higher than CDs because of the underlying investment. An example of a MYGA might be a five-year guarantee of 4% per year. Similarly, a five-year CD might only pay 1.25%. Both are very safe and predictable investments. Although a Multi Year Guarantee Annuity is very similar to a Bank CD, the MYGA offers the following key benefits over Bank CD’s :
- Unlike bank CD’s where the interest is taxable every year, the interest earned with a MYGA grows tax deferred until you withdraw it.
- You can withdraw money from the annuity. Sometimes it’s just the interest and sometimes it’s up to a 10% withdrawal. However, with most Bank CD’s there’s usually very little liquidity. In fact, in most cases withdrawals typically have a penalty ranging from 3 to 6 months worth of interest.
- MYGAs normally pay a higher contractual interest rate than a CD, and interest earned compounds tax deferred until you take the money out.
- Fixed Rate Annuities (MYGAs) have no internal fees and usually consist of very low commissions payable to the agent or advisor.
Read the full disclosure from each insurance carrier for full details of the MYGA you select.
In Summary :
Fixed Rate Annuities are a great alternative to Bank CDs if your investment period and goal is more than two years in the future.