A Multi-Year Guaranteed Annuity (MYGA) is another conservative choice for those looking for stable income upon retirement. It’s different from other annuities by how funds accumulate, options for withdrawal during the surrender period and after, and how they’re taxed.
How Do Funds Accumulate?
Getting a MYGA begins when you make a lump sum payment to secure the policy. Policies tend to range from three to 10 years. Like other annuities, MYGAs grow tax-deferred. As you add to your account and accrue interest, you do not have to report it as income. It’s not income until you withdraw it.
Since MYGAs are a type of fixed annuity, their growth doesn’t hinge on the stock market. A MYGA isn’t an investment portfolio, so any market volatility will have no bearing on how much or how little you can collect when it comes time to withdraw. This is part of what makes it a conservative choice.
MYGAs are arguably even more of a conservative choice than standard fixed annuities. The compounding interest is guaranteed for the entire life of the policy, be it three years, five years, or 10 years. Traditional fixed annuities do not promise interest growth for the entirety of the time the policy is active. For a 10 year policy, a fixed annuity may only provide interest growth for five out of those 10 years.
Interest rates vary between policies and how long the surrender period lasts. A five-year may have a rate of 3.2%, while the interest rate for a three-year may be 2.1%.
How Does Withdrawal Work?
Another unique feature of MYGAs is the ability to make withdrawals during surrender periods without incurring penalties. However – this is as long as the withdrawals stay within a certain percentage of what is in the account. Some will allow policyholders to withdraw up to 10% of what is in the account. This serves as a major advantage when you need to get a large sum of cash on short notice.
Surrender charges and withdrawal limitations end once the surrender period is over. Once you make withdrawals, income taxes go into effect. How your earnings are taxed depends on what you used to fund your MYGA. If you made payments from another tax-deferred account such as an IRA, you’ll have to pay taxes on principal and interest. If you made payments using a source other than a tax-deferred account, your taxes will be on the interest only.
However, you don’t have to begin spending your earnings as soon as you get them. You also have the ability to move your funds to another annuity account, or you can renew the MYGA policy you already have.
Get Your MYGA Policy Today!
MYGAs are great for those who prefer reliable gains at a lower risk. The interest is guaranteed, while giving you the freedom to access portions at your disposal before the surrender period ends. If this is right for you, Coastal Insurance Planning is your go-to for MYGA and other forms of retirement planning!