Over the past year, interest rates have steadily declined, prompting savers to search for high-interest savings vehicles that protect their money from market risk. While high-yield savings accounts and certificates of deposit continue to be popular options, they’re not the only way to secure a competitive return.
Multi-year guaranteed annuities have been gaining attention as an alternative that can offer competitive yields and predictable growth. Learn more about how these products work and whether they’re right for you.
A multi-year guaranteed annuity, often referred to as a “MYGA,” is a fixed annuity offered by insurance companies. Investors deposit money into a MYGA and earn a fixed rate for the duration of the term.
MYGAs are often compared to certificates of deposit (CDs) because both lock in a rate for a fixed term. However, it’s important to understand that MYGAs are contracts with insurance companies, not bank accounts.
Here’s how it works: You deposit a lump sum with the insurance company, and in return, you earn a fixed interest rate for the entire contract term — also known as the “accumulation phase.” This typically lasts three to 10 years.
Taxes on accrued interest are deferred until you make a withdrawal, allowing your returns to compound faster than a traditional deposit account. However, withdrawals are usually limited during the accumulation period; most MYGAs allow you to withdraw a small portion each year (around 10% of the balance) without penalty, but larger withdrawals may trigger surrender charges.
When the contract term ends, you can generally withdraw the funds, roll them into another annuity, or convert the balance into a stream of income payments. Keep in mind, however, that withdrawing money from an annuity can result in tax penalties if you are under the age of 59½.
Note that annuities are not backed by the FDIC like other savings vehicles, but they are guaranteed by the insurer.
Today’s best MYGA rates can be pretty attractive, especially when compared to CDs and similar time deposit accounts. Longer contracts sometimes offer higher yields, with some products advertising rates above 7% for 10-year terms, though these often come from insurers with lower financial-strength ratings.
Because rates and financial ratings vary widely across providers, it’s important to compare multiple insurers and contract terms before choosing a policy.
Opening a MYGA is fairly straightforward. Typically, it involves some comparison research across insurance providers to find the best rate and term. Be sure to consider the insurer’s credit rating when comparing MYGAs, which can tell you a bit more about the company’s customer experience, financial stability, and trustworthiness.
Read more: Is your bank financially sound? Here’s how to find out.
Once you’ve selected a MYGA, you’ll need to submit an application online or with a licensed insurance agent. Once you’re approved, you’ll fund your MYGA by transferring pre-tax dollars from a tax-advantaged retirement account (known as qualified funds) or after-tax dollars from a bank account or other personal funds (known as non-qualified funds).
The minimum amount needed to open a MYGA typically starts around $5,000, but can be as high as $50,000 to $100,000 or even more in some cases.
The money in your MYGA will compound for the duration of the term; when you near the end of the term, you can choose to receive a payout, roll your money into a new annuity, or opt into income annuity payments.
Remember: Making an early withdrawal may result in a surrender charge equal to a percentage of your account’s value.
There are a few pros and cons of multi-year guaranteed annuities to consider when deciding whether these investments make sense for you.
The predictability of earning a fixed interest rate can be attractive for investors who want to protect their savings from market volatility. MYGAs can also offer higher rates than traditional deposit accounts, plus tax-deferred growth.
On the flip side, money held in an MYGA is not federally insured. It is guaranteed by the issuing insurance company, which can provide some peace of mind. But you could still end up losing your money if the insurance company goes under.
Other potential downsides include tax penalties for early withdrawals, limited access to your funds during the term, and the risk of rising inflation impacting your money’s purchasing power over time.
Read more: How inflation affects savings: Here’s the interest rate you need to beat
Deciding whether a MYGA is right for you will require you to make key considerations about your risk tolerance, investment goals, and savings timeline.
MYGAs can offer predictable growth for a set period of time without risking your money in the market. For investors with a low risk tolerance, this can be a smart move, especially if you’re investing for the long-term and want to pad your income stream later in life.
However, if you’re an investor with an appetite for risk and you don’t mind exposing yourself to market swings for a bigger payoff, you might consider other investment options.
