Pondering CD Annuities (Multi-Year Guarantee Annuity; MYGA)

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A reader recently mentioned using fixed annuities called MYGAs (Multi-Year Guarantee Annuity), or CD annuities, as an alternative to the traditional CD. Let’s take a quick look.

Here are two lists (link, link) you can look through to get a feel for the rates offered on MYGAs.

MYGAs are quite similar to traditional CDs in that you deposit a certain amount of money for a fixed amount of time and you get the money back with the interested added on top after the fixed timeframe. Like CDs, your money is often locked up for that fixed timeframe and you may have to pay a penalty or lose the interest gains if you withdraw before the agreed timeframe.

The primary way that MYGAs differ from traditional CD’s is that they are issued by insurance companies instead of banks. This means there’s no FDIC insurance backing you up in case of default. Most people will only buy an annuity from an insurance company highly rated by respected rating agencies.

(It’s worth noting that you aren’t entirely dependent on the insurance company going under water since all insurance companies are required to belong to a state guaranty association. These associations guarantee balances up to the state’s statutory limit, typically $250,000. As I understand it, you won’t really lose money unless all insurance companies in your state go bankrupt since they are all ‘tied together’ to cover each others balances. Still, for larger investments, it’s definitely important to research the insurer well and make sure they are top rated.)

The most important distinction, though, between CDs and MYGAs is that the latter is meant as a retirement product, and thus comes with is a 10% penalty for withdrawals made before the age of 59.5. Someone who is currently 50 and wants to buy a 10-year MYGA won’t have any penalty issues given their 60 year age at time of withdrawal. Often the MYGA rate might be high enough to be worth buying even after factoring in the 10% penalty.

MYGAs are typically between 3 and 10 years. Interest gets compounded annually. Each MYGA will have a different minimum investment amount, e.g. $10,000 or $20,000 or more.

A major advantage to MYGAs is the ability to continually renew the annuity (or even exchange it directly into a new annuity) and take all of the gains at a future date of your choosing, thus delaying a taxable event until a more favorable time. 

It’s important to note that there are all types of annuities out there, some of which are variable or tied to the stock market, some which pay out in monthly increments, etc, etc. Here we’re only discussing fixed annuities which offer a fixed return percentage for a set number of years and operate much like a CD with an initial deposit and a payout at end of term. Before locking into anything, be sure to do your research in understanding the product offered. 

Conclusion

In the end, there are a few scenarios that MYGAs make sense:

  • MYGAs can make sense as a retirement plan and a means of getting a predictable income stream in those years. (Of course there are many other types of annuities which work well for retirees as well.)
  • They can also make sense for someone who plans to hold cash for many years and who doesn’t plan on needing the cash any time before they are 59.5 years old.
  • Finally, an MYGA can make sense for anyone as a means of holding cash if the rates are significantly above traditional CDs. The MYGA rate might be superior to CDs even when factoring the 10% penalty.

Often, there can be a mixture of the above scenarios which can make an MYGA useful, especially after factoring in the tax deferment flexibility that these annuities offer.

Feel free to chime in below with your own thoughts or corrections. Also, please let me know if you find this kind of content useful which we’ll keep in mind for the future.

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