What Is a Multi-Year Guaranteed Annuity?

A multi-year guaranteed annuity (MYGA) is one of the most simple and straightforward members of the sprawling annuity family.

Similar to a certificate of deposit (CD), an MYGA guarantees a fixed return on your money for a set period of time. This type of annuity is designed to provide a stream of income, most often during retirement.

How Does a Multi-Year Guaranteed Annuity Work?

An MYGA is a type of fixed annuity. A fixed annuity supplies guaranteed retirement income payments. MYGAs sometimes are called fixed-rate annuities.

You typically fund an MYGA with a single premium payment ranging from $5,000 to $2 million, for example. The terms for this annuity generally are three, five or seven years. Taxes on interest earned from a MYGA are deferred until withdrawals start.

In the third quarter of 2022, sales of multi-year guaranteed annuities totaled $27.4 billion, up 4.7% from the previous quarter and 138% from the same period in 2021, according to Wink’s Sales & Market Report. Wink attributes the rising popularity of MYGAs to higher interest rates.

Who Should Consider a Multi-Year Guaranteed Annuity?

Typically, retirees 60 and above gain the most benefit from MYGAs. That’s because these annuities create a stable source of retirement income, offer a fixed interest rate and minimum guaranteed return.

In most cases, anyone up to age 85 can buy an MYGA.

This type of investment isn’t subject to market ups and downs in the same way that stocks and other assets are. Thanks to their steady returns, MYGAs can help diversify a retirement portfolio.

Keep in mind that if you do buy an MYGA, you normally get what’s called a “free look” period of 10 days or more. During that period, you can return the annuity and receive a full refund of your premium, minus any withdrawals that were made.

Who Owns an MYGA?

An MYGA can have one owner or joint owners. The owner or owners can substitute the annuity’s beneficiaries at any time.

When the owner or owners die, the beneficiary or beneficiaries receive a death benefit. The death benefit can come in the form of a lump sum of money or one of several annuity options.

Multi-Year Guaranteed Annuities vs. CDs

While MYGAs and certificates of deposit are similar, they aren’t exactly the same. For instance, you normally can withdraw at least some money from an MYGA without paying a penalty; the opposite is true for a CD. Here’s a comparison of MYGAs and CDs.

It’s worth noting that the guaranteed interest rates for MYGAs and CDs are in the same ballpark.

For example, you might find a five-year MYGA with a 5.2% interest rate and a five-year CD with a 4.5% annual percentage rate (APR). As these examples suggest, an MYGA tends to offer a higher interest rate than a CD.

Market Value Adjustments for MYGAs

MYGAs and other fixed annuities may come with something known as a market value adjustment (MVA). This adjustment, either positive or negative, can take effect when you make a full or partial withdrawal from an MYGA during an unauthorized period that surpasses the maximum penalty-free withdrawal.

In general, if interest rates climb above the guaranteed rate when money is taken out of an MGYA, the market value of your investment may decrease. But if interest rates fall below the guaranteed rate when the money is taken out, the value of the MYGA may be bumped up.

MVAs generally do not affect an MYGA’s death benefit or guaranteed surrender value. This value refers to the minimum value of the annuity to be paid under certain circumstances, such as voluntarily canceling a contract and receiving the annuity’s cash value.

What Happens When the Guaranteed Period for an MYGA Ends?

At some point, the guaranteed rate period for an MYGA will end. So, what do you do at that point? Your options include:

• Roll over the funds. Withdrawing the money, then rolling it over into a new MYGA with a new rate and new surrender fees.
• Annuitize the contract. This means converting the MYGA investment into an annuity that provides regular income payments.
• Automatically convert to a new contract. Holders may allow an MYGA to automatically convert into a new contract with a new rate and new surrender fees. You’re typically given 30 days’ notice before this happens.
• Renew the contract. Letting the contract renew with an annual rate that may be higher than the guaranteed rate and without any surrender fees.

Tax Implications of Multi-Year Guaranteed Annuities

Taxes earned on interest from an MYGA are deferred. Otherwise, the tax situation differs depending on whether the annuity is qualified or non-qualified. Generally a qualified annuity is funded with pre-tax dollars, while a non-qualified annuity is funded with after-tax dollars.

If you fund an MYGA with money from a qualified account like an individual retirement account (IRA) or another type of tax-advantaged retirement account, you’ll pay taxes on the principal and interest when you take money out of the annuity.

If the money you put into an MYGA comes from non-qualified funds, only the earned interest will be taxed.

Tips for Buying an MYGA

Are you in the market for an MYGA or another kind of annuity? The National Association of Insurance Commissioners offers the following tips:

• Read the contract. Check the interest rate, know how quickly the annuity will grow in value and figure out when you can take advantage of the benefits.
• Be aware of the tax consequences. Make sure you know whether the annuity is tax-deferred, meaning you typically won’t be taxed until you start receiving payouts.
• Try before you buy. In many states, an annuity buyer can use a “free look” period to decide whether to cancel the annuity without losing the premium or paying a penalty.
• Be mindful of fees. Withdrawing your money from an annuity before it has matured might trigger surrender fees, also known as surrender charges, as well as other expenses.
• Look out for scams. Many people have been victims of annuity scams. If you believe you were caught up in an annuity scam, contact your state insurance department to get help or file a complaint.

More From Advisor

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.