Multi Year Guarantee Annuities (MYGA) – What are they?
A Multi Year Guarantee Annuity (MYGA) is a fixed interest tax deferred annuity that has a guaranteed return that stretches over several years. MYGA’s are normally issued with maturities ranging from three to ten years. The return on a MYGA is most often guaranteed for the entire surrender period. Every feature in an annuity has an actuarial cost. Therefore, to boost return, MYGA’s are stripped down versions of more traditional deferred annuities, with less flexibility and fewer optional benefits. Because the primary focus of a MYGA is yield, they are often some of the highest paying annuity rates.
Sometimes MYGA’s are called CD annuities or CD like annuities, but this is a misnomer. A CD is issued by a bank and most CD’s are insured by the FDIC. A MYGA is an annuity and it is guaranteed by the insurance carrier, which is a private or publicly own company. Insurance companies are closely regulated by the various state insurance departments, but annuity deposits are not protected by any form of federal insurance fund or policed by any federal agency. That does not, in and of itself, mean that insurance companies are not strong financial institutions. (see How Insurance Companies are Rated coming soon).
Even though MYGA’s have relatively short term guarantees, they can still be used for long-term accumulations. At the end of the guarantee period, the MYGA owner has two options. Renew the MYGA with the current carrier for an additional period or look around for the highest MYGA rates and transfer the funds to another insurance company. Section 1035 of the Federal tax codes provides for a tax free exchange of one annuity for another. This provision allows savers to defer taxes and compound earnings until they are needed for retirement and also to continuously shop for the best annuity rates. In some retirement planning circles this practice of rolling from one top MYGA rate to the next is called a MYGA chain.
MYGA’s are taxed exactly like any other fixed annuity. (see Annuity Taxation)
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