A Multi-Year Guarantee Annuity, or MYGA, provides you with the opportunity to lock in at a set rate of interest for a specified period of time, such as 3 years, 5 years, 7 years, or even 10 years. Typically, the longer the rate guarantee period, the higher the interest will usually be.
During this time, the funds that you have in the annuity are also allowed to grow and compound on a tax-deferred basis. As with other types of fixed annuities, your principal will remain safe, even if the stock market tumbles to an all-time low.
So, in periods like the 2008 recession or the 2020 Coronavirus pandemic (and the corresponding stock market crash,) you can be assured that your money in an MYGA annuity will still grow.
This can be a nice feature – especially if interest rates in the economy stay the same or go down in the near future. But what happens if your money is still locked up in a multi-year guarantee annuity and interest rates are raised?
That could pose a dilemma.
Options for an MYGA Annuity If Interest Rates Go Up
Depending on just how much higher interest rates are, it could make sense to move money from a multi-year guaranteed annuity. In most cases, though, because rates typically go up gradually, you could still end up netting more by keeping your funds where they are.
In any case, there are some important items to consider before you make any type of changes. These should include:
- Surrender Period
- IRS Early Withdrawal Penalty
One of the most important criteria is the annuity’s surrender period. Most annuities will charge you a penalty if you cancel the contract or you take out more than a maximum amount (usually 10%) of the contract’s value before the surrender period has expired.
The length of the surrender period on MYGA annuities is typically the same length as the rate guarantee period. So, for instance, if your interest rate is guaranteed for three years, then the surrender period will also be three years. And, if your interest rate guarantee period is ten years, then the surrender charge period will also go on for a decade.
In addition, if you opt to keep your money in an MYGA annuity for another period of guaranteed interest (after the initial guarantee period has elapsed,) the surrender charge period will oftentimes reset.
Taxes are another item to consider before you make any changes to a MYGA annuity. This is because any of the gain that is withdrawn will be taxed as ordinary income. If you “rolled” funds from a traditional IRA (Individual Retirement Account) or 401(k) plan, none of the contributions have likely been subject to taxation. Therefore, 100% of the funds that you withdraw will be taxable.
If you take these withdrawals before you have reached the age of 59 ½, you may also be charged an additional 10% “early withdrawal” penalty by the IRS. With all of this in mind, it is essential that you determine whether or not you will be better of just leaving your money in a multi-year guaranteed annuity – even if interest rates in the economy go up.
Is an MYGA Annuity Right for You?
Talking over your short and long-term financial objectives is the first step you should take before you purchase an annuity or make changes to an annuity that you already own. At Annuity Gator, our primary mission is to educate individuals and families about how annuities work, and how these flexible financial vehicles may or may not fit into your overall planning mix.
If you would like to discuss the benefits of generating tax-deferred growth and receipt of a guaranteed lifetime income, please feel free to reach out to us directly by calling (888) 440-2348, or via email to our secure online contact form. We look forward to answering any questions that you have.