If you want a predictable return on a portion of your portfolio, a multi-year guaranteed annuity (MYGA) may be worth checking out. A MYGA locks in an interest rate for several years, and the interest can grow tax-deferred until you withdraw it. This combination sounds appealing, especially if you’ve searched for the best fixed annuity rates. But a MYGA is an insurance contract, and it comes with different risk and withdrawal rules than a certificate of deposit (CD).

Let’s look at how a MYGA works and how to determine whether the tradeoffs are worth it.

What Is a MYGA?

A MYGA is a type of fixed deferred annuity issued by an insurance company. You’ll typically pay a one-time premium, and the insurer guarantees an interest rate for a set number of years, with three, five, and seven years being the most common.

You can think of it like an insurance industry alternative to a CD. You know the rate you’ll earn during the guaranteed period, assuming the insurer meets its obligations. But unlike a CD, a MYGA isn’t FDIC-insured.

Unlike an immediate annuity that starts paying income soon after purchase, a MYGA lets your money accumulate interest during the guaranteed period. And you don’t have to convert the balance into lifetime income payments when that period ends.

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How Does a MYGA Work?

Let’s say you put $100,000 into a five-year MYGA with a guaranteed 5% annual rate. If the interest compounds annually and you leave the money untouched, the contract would be worth $127,628 after five years, before taxes. However, the actual contract terms determine how interest is credited.

At the end of the guaranteed period, you may be able to withdraw the balance, leave it in the contract at a new rate, or move it to another annuity. Always review the contract before buying, including what happens when the initial rate expires and how long you have to make a decision.

Also, check whether the surrender period matches the rate guaranteed period. Withdrawing more than you’re allowed before the surrender period ends could result in a fee.

What Are the Pros and Cons of a MYGA?

A MYGA can offer predictable growth and possible tax benefits, but it does have limited liquidity. Here are the biggest pros and cons to consider.

Pros

  • Predictable growth: The insurer guarantees a stated rate for the contract’s guaranteed period. That means you don’t have to guess what an underlying stock or bond will do to calculate your returns.
  • Tax deferral: In a non-qualified MYGA purchased with after-tax money, interest isn’t usually taxed while it remains in the contract. You’ll owe income tax on any taxable gains once you take them out. This could be appealing to a higher earner who expects to withdraw the funds in a lower tax bracket.
  • Possible rate advantage: MYGAs sometimes offer higher rates than CDs with similar terms.

Cons

  • Limited liquidity: Many MYGAs allow some withdrawals without a surrender charge, but taking out more during the surrender period can be costly. Some contracts also include a market value adjustment that may increase or decrease the amount you receive if you withdraw early.
  • Insurer risk: The guarantee depends on the insurance company’s ability to pay. State insurance guaranty associations offer some protection if an insurer fails, but coverage limits and rules vary by state. The protection isn’t the same as FDIC insurance on an eligible CD.
  • Opportunity cost: If rates increase, your existing MYGA keeps paying its contracted rate. Inflation could also reduce what your balance can buy in the future.
  • Taxes on withdrawals: Gains are usually taxed as ordinary income when withdrawn. If you take taxable withdrawals before age 59 1/2, you may owe an additional 10% federal tax, even if the insurer doesn’t charge a surrender fee.
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MYGA vs. CDs: Which Should You Choose?

A CD may be the better option if FDIC insurance is important to you or you want to avoid dealing with an insurance contract. A MYGA may be more appealing if its rate is significantly higher and you’re comfortable leaving the money in place for the full surrender period.

Make sure to compare the after-tax result, not just the headline rates. For example, a MYGA’s higher rate and tax deferral may be appealing, but you’ll have to weigh those benefits against withdrawal restrictions and the insurer’s financial strength.

Is a MYGA Worth it?

A MYGA may be a good option, especially if you want a guaranteed return on money you won’t need for several years. Compare it with CDs and other fixed-income options available. Ultimately, the right decision depends on the insurer, taxes, and whether you can live with the contract’s limits.

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