Inflation has been the topic of many conversations regarding the economy after the rise of the COVID-19 pandemic, and households are feeling the budgetary constraints with few signs of reprieve any time soon. During this time, people are wondering what financial options can help to hedge losses.
Many are choosing certificates of deposit for their predictable growth and relative shelter from market conditions. However, while CDs do not respond to market fluctuations in the same way as stocks might, they are not the only option for securing monetary accumulation during times of high inflation.
MYGAs are another beneficial option. This is what you should know about how inflation impacts CDs and how MYGAs can function as an alternative to CDs.
Understanding CDs and MYGAs: The Issuers
MYGAs and CDs are both financial products that can provide a location in which money can accumulate. However, they are issued by different sources. MYGAs, which are a type of annuity, are provided by life insurance companies.
Conversely, certificates of deposit are issued by banks and financial institutions. This means that someone who is considering the differences between the two will also be choosing which type of entity they work with; some may prefer to collaborate with a bank, while others may know and trust a specific life insurance agency.
Current Inflation Statistics
As of July 2023, inflation has slowly begun to level out—but that does not mean the financial repercussions are over. The current inflation rate of 2.97% remains above the historical average, and at this point one year ago, inflation had soared to more than 9%, reaching its peak since the pandemic.
Rates have not yet returned to their former states from January 2021 and prior, which is why it is still important to factor this element of the economy into any financial decisions being made for the short and medium term.
How MYGAs Address the Inflation Issue: Taxation
When considering how to increase wealth in light of inflation, multi-year guaranteed annuities (MYGAs) are a customizable choice that function differently than certificates of deposit in terms of taxes. MYGAs accumulate at a predetermined rate just as CDs do, but they are tax deferred.
This means that taxes on the accumulated amount are not due until that accumulation is received as income. This allows the full balance to accumulate without annual taxes, preserves more money, and enhances growth to combat inflation.
In most cases, a MYGA’s accumulation becomes a taxable event when the term of the MYGA ends and the money is returned to its owner. Conversely, a certificate of deposit requires the owner to pay taxes each year on the amount of accumulation that has occurred. The bank will issue a tax form for the purposes of reporting this to the IRS.
The tax deferral benefits of a MYGA are not the only area in which this type of annuity differs from a certificate of deposit. Riders can also be added to many annuities specifically to factor in and guard against inflation.
The flexibility of MYGA terms and rates allow people to choose the ideal product for their circumstances, which may grant access to a higher overall rate than what they can find from their selection of CDs.
Some MYGAs may also include contract terms that allow for smaller withdrawals (typically less than 10% of the total balance each year). Compare this to a CD, from which no money can be withdrawn without incurring heavy penalties.
MYGAs are provided by insurance companies rather than banks keeping these products separated from market conditions. For those looking to diversify and maximize the amount of financial protection achieved during periods of high inflation, a multi-year guaranteed annuity addresses the issue of losing value due to inflationary market conditions and is an alternative to CDs.
Get the MYGA That Is Right for Your Goals
Choosing the right financial product for your goals requires careful consideration, and in times of higher than average inflation, this choice can seem even more complicated. However, multi-year guaranteed annuities do not lose value when inflation is high, and they can help to mitigate the damage caused by economic challenges that we are facing in 2023 due to their tax advantaged deferral.
Pillar Life Insurance understands that making the right financial choice is a highly personal decision, which is why we offer a self-service online portal where you can select the appropriate MYGAs for your goals without needing to speak to a broker or middleman. Review our online offerings to get started.