Lots of people worry about having enough money for retirement, and there are numerous ways you can save for the future even if you don’t make a ton of money.
A multi-year guaranteed annuity, or MYGA, is one of those ways, and it is easier to understand than you think.
A MYGA is a type of fixed annuity that allows you to receive payments after you retire. Tax-wise, they’re a little complicated to understand, but the right financial planner or accountant can help you understand them a little better.
What Is a MYGA?
Before we discuss any MYGA traits, let’s talk about what annuities are. An annuity is simply a contract between you and either a financial institution or insurance company that allows you to make either a lump-sum payment or regular payments for a while, and when you retire you get a guaranteed income stream that helps you live your life when you have no regular income coming in.
When people get a large sum of money, such as an inheritance or even a lottery winning, they often put that money in an annuity. They provide the money to the insurance company or bank then receive the money later after they retire. There are two main types of annuities:
- Fixed annuities, which allow for a steady stream of income that is the same amount month after month
- Variable annuities, which usually provide a different amount each month depending on how well the money is doing in its investments
Most people prefer fixed annuities, which includes MYGAs, because the income you receive is the same and therefore it is easier for you to budget after you’re retired. Some people dislike MYGAs because they are usually locked up for a period of time.
That being said, you usually don’t have to wait very long to start receiving your money because that locked-up period of time is usually very short.
The Features of a MYGA
MYGAs can be funded through monthly payments or one lump sum, and the latter seems to be the most popular. You can deposit from $5,000 to $2 million in most cases, and their terms are usually 3, 5, or 7 years. Even better, these are tax-deferred accounts because you do not pay taxes on the money until you start receiving payments after you retire.
For the most part, anyone up to 85 years old can set up an annuity. MYGAs and other fixed annuities are generally not recommended for people under 60 years of age simply because they are illiquid and usually don’t allow you to withdraw any money before retirement without penalties.
They are, however, a great addition to a retirement portfolio because they offer fixed payments at retirement.
Just like other fixed annuities, MYGAs have an accumulation phase, which is the phase where the annuity is being funded; and an annuitization phase, which is when the payments begin.
During the accumulation, most MYGAs do not allow you to withdraw any of the money without paying a penalty. This penalty is called a surrender fee or surrender charge.
How to Set Up a MYGA?
Setting up a MYGA isn’t difficult, but you do have to understand how these annuities work and what your tax implications will be.
If you’re considering including a MYGA in your retirement portfolio, it’s best to consult with a financial professional to make sure you completely understand this product. In addition, utilize the following tips to make sure a MYGA is right for you:
- Ask about the tax consequences; in other words, is the MYGA tax-deferred, and is a tax-deferred financial tool the best tool for someone in your tax bracket? MYGAs are right for a lot of people, but you want to be sure before you make your final decision.
- Know exactly what the fees are. No one intends to withdraw money during the accumulation phase, but you may find yourself needing to do so at some point. Because of this, you’ll need to know what they are going to charge you in surrender and other fees.
- ALWAYS read the contract before you sign. This is crucial because even though they are usually fairly easy to understand, you still want no surprises at any point in the future. If anything in the contract is unclear, ask questions until you completely understand every word of it.
- Understand that most sellers of MYGAs will provide you with what is essentially a “trial” period. It is usually a short period of time, but during this time, you can try it out, so to speak, without paying a fee or losing any of the money you’ve already paid into it.
- ALWAYS be aware of scams. Check out the provider of the MYGA to make sure they are legit. If you find you are the victim of a scam, contact your state’s department of insurance and they can likely help.
A multi-year guaranteed annuity, or MYGA, is a way to make a lump-sum payment or monthly premiums then receive regular payments after you retire.
MYGAs are a great addition to your retirement portfolio but should not be used as the only retirement tool. MYGAs have few disadvantages and are favorites of people who have a lottery winning or receive an inheritance.
This is not to say that you won’t be scammed if you try to set up a MYGA, so always be extra careful and check out the insurance company or financial institution that helps you set up this product.