In this video I explain what Multi-Year Guarantee Annuities (MYGA's) are, how they work, and why they have become more popular recently. We will look at the liquidity options, terms, taxes, some current MYGA rates and more.
I'll cover the important things to know about MYGA's, and I'll share some thoughts on how you might consider integrating them within your overall retirement portfolio.
Full Transcript:
(00:00):
In this video, I'm going to explain what a Multi-Year Guarantee Annuity is, how it works, what's it all about, and also why it's become more popular in recent times. And then in a moment here, we are going to compare and contrast a MYGA versus a CD, which you can get at a bank.
And then we'll also look at some current MYGA's today, the current rates and how they work. So first thing though, the reason why these products have gained in popularity recently is very simple. It's just that interest rates have gone up quite a bit. Just like you've seen interest rates on CDs have gone up. You're also seeing interest rates on MYGA's. They've gone up quite a bit as well.
So let's go ahead and do a little compare and contrast between CDs and MYGA's. These are similar products, but they're definitely different. There's definitely differences.
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So let's go through it. So first off, where can you get it? So with CDs, you can get them at a bank, right? With MYGA's you can get them with an insurance company. What protections are there? Well, with CDs, they're typically insured by FDIC up to a certain amount. And with MYGA's, they're backed by the insurance companies. So this is where I'll generally advise that we look at companies that are higher rated in making this selection.
Do you pay a fee? So the answer is no. With both CDs and MYGA's, whatever the interest rate is that you're going to get, that's the interest rate you're going to get if you keep it for the length of the term, there is no extra fee or something that's attached to it. Now, certainly both the banks and insurance companies make money, but they're making it because they're considered spread products.
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They're able to make money from your money. Right. Now, what are the terms? So with CDs, they're generally shorter. They're typically anywhere from three months to five years depending on the particular CD. And with MYGA's, they're anywhere from three years generally to about 10 years.
What are the interest rates? So with CDs, they're typically lower than what you're going to find on my MYGA's. And is the interest rate fixed for the entire term with both? Yes. Again, so whatever that interest rate is, whether it's three months or five years or ten years, that rate is going to be locked in for that length of the term.
How does taxation work with CDs? If you don't hold it within a retirement account, you're going to get that 1099 every year, and you'll have to pay taxes on the interest. Now, if you own that CD inside of a retirement account and you don't take any withdrawals from the retirement account, then you're not going to get a 1099.
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It's going to be tax deferred in that case. Now with MYGA's, even if it's held outside of a retirement account, the interest is going to be tax deferred. If you're not taking withdrawals, you're not going to have to pay any taxes that year. There's no 1099. They're only going to issue a 1099 if you withdraw money and you have interest that you've earned that you now have to pay taxes on. If that annuity was held inside of an IRA, again, also because it's in an IRA, it's tax deferred. But if you were to withdraw money from the IRA of which the annuity would be inside of perhaps, then you would have to pay taxes when you withdraw that money from the IRA.
Are there early withdrawal penalties? So with CDs, interest rate penalties may apply for early withdrawals. You may lose interest, not the principle. With MYGA's surrender charges, they're called, if more than the free amount is withdrawn during the term.
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So they're called surrender charges. So think of these as penalty charges. These are the penalties or the charges that you would have to pay if you withdraw more than what the free withdrawal amount is, which we'll get to here in just a moment. So these are some of the MYGA's that are on the market right now. Today, I'm recording this in April of 2024. And interest rates change all the time. Companies are constantly competing with each other and sometimes one company is more competitive than another.
Now, even though interest rates can change, again, as I've already said, once you're locked in for that length of the term, you're locked in. So that won't change. But here's how it works. So right now today for instance, there's one three year my gets paying 5%. Now there's others that are paying more than that, not a lot more, but a little bit more than that.
(05:02):
But it depends upon the company you go with is one factor. So in other words, how high are the ratings of the insurance companies? And there are companies that I will exclude, even if they do pay a higher interest rate, I want to use higher rated insurance companies that are more solid. And so that's one factor.
Another factor is how much liquidity do they have available to you during the length of the term? So for instance, some products only give you access to the interest along the way. So let's say you're earning 5% in interest, well then maybe you're only getting that 5% per year on that particular product as an example. All these products are different. They all have a little bit different features and liquidity and things that are available. But these are just kind of in general terms.
Now, this particular MYGA, this three year MYGA that I have here, it has a 10% free withdrawal both in the first year and then every year thereafter. So what that means is that if you put a hundred thousand dollars into this product, you can withdraw 10% the first year. So 10% of a hundred thousand dollars is $10,000, and then the next year you could also withdraw another 10%. Now some are based upon the actual premium that you put in. Some are 10% of the contract value. So that could be a different number for sure. So that's how that works.
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In the three year right now, this particular one's payingm or the interest rate is 5%. The five year I've got here is at 5.4 %. 7 years at 5.5% and 10 years at 5.2%. So one of the questions I get is why would I even consider a 10 year that's paying less than the seven or the five in this case? And one of the reasons that you may want to consider it is if you just want to have that interest rate locked in for a longer period of time, you may be very satisfied to know that you could lock in a rate that's higher than 5% for a 10 year period. And especially if interest rates happen to go down over the next several years, that could really be a nice win. But what happens with a lot of folks, if you're thinking of including MYGA's as a part of your portfolio, is to consider laddering them.
(07:41):
So not just buying one, but you might buy a three year and then a five year, maybe a seven or maybe a 10, maybe a four different MITs just as an example. And then that way in three years, you have one that's going to be out of its surrender period, free and clear, and you could do something else with. So a lot of different routes you can go and a lot of flexibility there. So that's a whole other subject, but just know there's different ways to approach that.
Now the other thing I want to talk about here, so you understand how this works, is that if you were to withdraw more than what the free withdrawal amount is, that's when you're going to be hit with that surrendered charge. And we're talking about this green area down here at the bottom. So think of surrender charge as like penalty charge, right?
(08:30):
We all understand penalties very easily with most other things. Surrender charge is just a very specific word towards insurance products. And so, in the first year, let's look at the three year MYGA. In the first year, let's say you put in a $100,000. If you were to withdraw $11,000 the first year, you're going to be able to get out 10% free and clear because you have a 10% free withdrawal, but you are going to have to pay a penalty on that additional thousand dollars because you're taking out $11,000, not $10,000. So on that additional $11,000, this particular product has an 8% surrender charge in the first year. So you're going to pay 8% on that additional $1,000. That's $80 to get out the $11,000 in that case. Okay? Now the other thing that you're going to notice here is that over time, the surrender charge schedule declines.
(09:34):
So you can see that a little bit here kind of in the three year, but you really notice it over here on the 10 year as an example. Now, all products are going to have different surrender charge schedules, even products with the same terms, same number of years are going to have different ones. This is just for general purposes only, if you will. I just want to give you a good understanding as to how these work. So that's probably 90% of everything that you need to know.
There's a couple of other little things. For instance, you can perhaps access money sooner from this product, even beyond the free withdrawal amount if perhaps it has on that product, maybe what's called a nursing home waiver or a terminal illness waiver. In other words, some products have the ability that if you had to go into a nursing home and you were there for a particular period of time, perhaps that you could access this money free and clear, no penalties, or if you were diagnosed as being terminally ill that you could access this money free and clear.
(10:41):
So different products have different provisions around that. So it's important just to understand how that works with annuities in general, and MYGA specifically all of this, you'd never want to put all of your money into these products. You're going to have a certain amount of money that's going to be in your cash account, your emergency reserve, your checking savings, and for your very short-term needs, car breaks down the roof leaks, just your short-term spending type needs. And you're going to have a certain amount there.
Everyone's going to have a different comfort level with the amount that you're going to want to have or the amount that you're going to need to have depending on your circumstances. And then this can kind of take the place of maybe that money that is going to act as more short to medium term or so, right? Three years, five years, seven years. And maybe you're more on the conservative side. Maybe you're also investing as well. You have money in the markets, but you want to take a portion of that and do something where your money isn't going to be subject to the downturns in the market.
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So there can be ways to integrate this as part of a broader portfolio as well. So a lot of different strategies that could be utilized around this. Hopefully, this just gives you a high level overview on how this works. If you have questions, make sure that you reach out. Take care, and we'll see you soon.