Multi-Year Guarantee Annuity - Great Rates
CD Style Tax Deferred Savings Vehicle
In this article I’ll specifically cover the basics of the Multi-Year Guarantee Annuity (MYGA) and how you can incorporate them into your savings portfolio. A MYGA is an annuity that one can put a little bit of money into and a certain interest rate is guaranteed for a certain number of years. People might refer to these products as Certificate of Deposit style annuities. MYGAs work in a very similar fashion as a CD. You put funds in a deposit account and it grows on interest and it grows on a tax deferred basis. Although MYGAs tend to have a longer obligation period than a CD and a few more restrictions on the money, there are more options at the end of the obligation period on how to get your money out with a higher rate of growth on the interest than a CD. There are a lot of features that make using a MYGA superior than using a Certificate of Deposit.
How does a MYGA work?
Annuities are an increasingly popular tool for investors planning for retirement thanks to the guarantee of some sort of income stream. In fact, according to the Insured Retirement Institute, U.S. annuity sales reached a staggering $229.4 billion in 2014.
"As people are living longer and longer, they are concerned about outliving their income in retirement," says Ray Caucci, senior vice president of product management at Penn Mutual Life Insurance Company. "Annuities are a great vehicle for those who want to ensure that won't happen."
As one dramatic example, Goldstein notes that New York Life has a policyholder who purchased an annuity in the 1980s, and is still collecting. "She put in about $100,000, and we've paid her more than $800,000 since," he says.
Each year, many Americans choose annuities to play an important role in achieving financial security for their retirement. Today’s retirees are living longer, healthier and more active lives than any generation before them; they need a reliable solution to guarantee the security of
their nest eggs. A deferred annuity with a growth rate that is guaranteed can assist in keeping retirees in the lifestyles they choose.
Why consider a tax deferred annuity like a Multi-year guarantee annuity?
A deferred annuity is an insurance product you can use to accumulate funds for retirement and other long-term objectives. This type of annuity allows you to defer receiving payments to a later date. By
including annuities in the strategy you develop to meet your financial goals, you can gain several important benefits:
> Competitive interest rates
> Tax-deferred growth
> Interest rate guarantees that never fall below a set minimum
> Principal protection against market loss
> Full liquidity under certain life events
> Guaranteed income for a lifetime
> Current tax savings More on Taxes and the Estate Plan...
> Possible avoidance of probate, its costs, delays and publicity
> Possible avoidance of taxes on Social Security payments
Why choose a financial product with tax-deferred growth?
Money grows faster in a long-term, tax-deferred product like an annuity because interest compounds on top of the money you ordinarily would have paid in current income taxes. A tax-deferred product may outperform a taxable one because you have three components working for you. See bar chart to the upper left.(Note: If money is already in a tax-deferred vehicle such as an IRA, there is no additional tax advantage.) Multi-Year Guarantee Annuities (MYGAs), sometimes referred to as "CD-Style Annuities," are a powerful type of annuity that can give you the ability to lock in a highly competitive interest rate for years to come, regardless of future fluctuations in the market.
Take a single premium (lump sum) and place it in a multi-year guarantee annuity. The annuity will grow at a guaranteed interest rate anywhere from two to ten years whatever period is selected. The cash accumulates and compounds at a certain guaranteed rate, on a tax deferred basis. As the cash generates interest over time the tax is deferred until later in life when your income is lower and you are in a lower tax bracket. You can also us a MYGA to grow cash and roll it into a more income style annuity to fund retirement benefits and other life events.
In the short term – a lump sum of money can be used to provide a stream of income later in life, specifically after the age of 59 and a half. They can also be used as an income booster for underperforming CDs. If you have money in cash, CDs, bonds, under the mattress or in a savings account, a MYGA can grow this cash on a tax deferred basis.
Concerned about dips in the market?
A Multi-Year Guarantee Annuity with the guaranteed interest rates will carry you through several years of underperforming interest rates with a solid performance. You can also use a MYGA as an accumulation vehicle for future projects and investments. If you have a situation where down the line you want to take an income and not sure what vehicle might work best, a MYGA can be a great choice to park this funding and once you have a plan for the funding you can do a 1035 exchange and place the money into an income style annuity or other income vehicle.
Here are two Examples in the use of a multiyear guarantee annuity
The RBC 7 multiyear guarantee annuity
It’s a seven year MYGA with a guaranteed interest rate of 2.80%. For the first 7 years of this product a 2.80% interest rate is guaranteed. In the first year there is a rate bonus of 1 percent to bring the interest rate up to 3.80%. The minimum premium (deposit) is $5,000.00. This means if you have cash that you want to have safe and reliable growth on, you will find a lot of benefit using this product. There are very few products available with a minimum deposit of less than $5,000.00. Some will start at $5,000. Some will start at much more at $15,000.00 to 20,000.00 and even $75,000.00 in some cases.
The ING Guarantee Choice 10
It provides a 10 year rate guarantee at 3.70%. At the end of the 10 year period It’s renewable for guarantee periods of 3, 5, 7 year periods and the surrender charges do not reset. So that means you can renew down the line and get another rate guarantee and not be subject to any surrender charges. Your money will be easily accessible. The minimum premium (deposit) for this product is $15,000.00.
How liquid is the money if you need to get it back out when you need it?
It’s easy to take it out at the end of the period, you can take it out in a lump sum or annuitize it. But what if you wanted to take it out during the life of the annuity? Many MYGAs will allow you to take 10% out of the MYGA during the life of the annuity annually without a penalty. This allows you to keep some money liquid to pay for unforeseen expenses.
If you have money that is currently in cash, CDs, bonds, under the mattress or in a savings account, a MYGA provide a solid and predictable return on your money. Of course if you have a tolerance for more risk you can also consider fixed annuities or equity indexed annuities. If you’re looking at a very long term period like 20 years of income deferral you may want to look at products like American Equities Income Bonus Gold or Avyva’s Income Select products. These products offer much longer deferral periods than most MYGAs will offer.
There are several types of annuities and the Multi-Year Guarantee Annuity - Great Rates is one of the most simple types. It’s one deposit that will grow on a tax deferred basis for a certain number of years.