MYGAs are similar to Certificate of Deposit (CDs), which are issued primarily through the bank industry. The similarities between these two products are shortto mid-term investments, declared interest rates for the duration of the product’s term, and being classified as safe money investments. Many retirees use these products as short-term accounts during retirement and as an emergency fund.
Just like comparing a zebra to a horse, even though they look similar they are very much different animals. That is a similar situation with MYGAs and CDs. Some of the key differences between MYGAs and CDs are tax-deferral versus annual taxable, allowing for additional deposits, liquidity options during the product’s term, offering a lifetime income option, and beneficiary solutions on qualified accounts. MYGAs offer the majority of the features that CDs offer plus many more. A side by side chart comparing MYGAs with CDs is provided as Appendix A to this document. This chart will provide a consumer with a list of benefits to consider when deciding which product best suits their needs.
Typically MYGAs offer higher interest rates than CDs, but that is not the only factor investors want to evaluate when considering these two investments. In other words, one size does not fit all. Take a look at the comparison chart (Appendix A) to make an informed decision.
MYGAs as a solution in low interest rate environments. Chris said many retirees in Memphis, found a solution for their short-term, safe-money needs in Multi-year Guaranteed Annuities, also known as MYGAs. MYGAs are fixed annuities that guarantee a declared interest rate for a pre-set number of years. These types of fixed rate annuities are issued by insurance companies with surrender periods, most commonly, from three to 10 years in duration. The guaranteed interest rate period is usually equal to the duration of the annuity contract’s surrender charge period. At the conclusion of the surrender charge period, the annuity owner has the ability to either invest the annuity contract’s value into another investment vehicle or allow the funds to remain in the current annuity with a new declared interest rate and surrender charge schedule.
Annuities offer more features and flexibility than CDs, but that does not imply that they are the most appropriate investment account for your safe-money investing. Typically, investors that are still in their accumulation years will purchase CDs while pre-retirees nearing retirement and retirees will opt for MYGAs.
Chris Sumner,an Investment Advisor Representative in Memphis, feels the reason annuities are better suited for those who are age 59 ½ or older; or for those who do not intend to withdrawal interest or principal(on IRAs) until normal retirement age, is that they can be subject to IRS early withdrawal penalties. He explains that whether an annuity is funded with pre- or post-tax dollars, the owner can be penalized by the IRS if taking withdrawals of taxable dollars before age 59 1/2. The IRS early withdrawal penalty does not apply to owners older than age 59 ½ or the beneficiary(ies) of the MYGAs when the owner passes – regardless of age.
Albert Einstein once stated that, “Compound interest is the eighth wonder of the world.” With a Multi Year Guaranteed Annuity tax deferral benefit, the investor receives triple compounding interest: interest on the principal, interest on the interest, and interest on the tax-deferred earnings. Your interest will compound through tax deferred growth each year and accumulate more quickly than a taxable CD.