When planning for your financial future, it’s no secret that you have a wide variety of options to choose from. Do you invest in stocks? What about bonds? These are two of the most commonly known places to put your money, but if you haven’t heard of a MYGA (multi-year guaranteed annuity), you could be missing out on a useful tool that may be a better fit for your situation.
MYGAs are a type of annuity that can help your money to grow without the risk associated with other choices such as stocks. The mechanism for a MYGA’s growth is actually somewhat within your control; here’s what you need to know.
What Is a MYGA?
In many ways, a MYGA is the insurance industry equivalent of a certificate of deposit, but with some important, and beneficial, differences. In a MYGA, you contribute a lump sum upfront, then determine how long you want that money to be committed to the annuity.
Once you open the MYGA, your investment begins to grow at the rate stipulated in your contract. Because a MYGA is a “guaranteed” annuity, you will have the certainty of knowing that your money will grow continually at the rate you agreed to for the duration of the term. When the term of your MYGA is over, you can roll it into another MYGA to continue its growth, take the money or put it into another annuity to start receiving payments.
What Causes MYGA Assets to Grow
The reason that MYGA assets grow comes down to the accumulation rate, but it is more nuanced than that. You will put your money into the vehicle, leave it alone and it grows according to the rate. A certificate of deposit, for example, appears to do the same thing. However, the important difference with a MYGA is that your lump sum will grow tax-deferred.
In a certificate of deposit, you will be expected to pay taxes each year on the growth that your lump sum generates, as if it were income. However, a MYGA defers these taxes until you realize your gains. In other words, until the accumulated money is returned to you. This means that you have a greater balance not impacted by taxes and growing faster than it would in a CD.
The growth is rolled into the principal balance, not placed into a separate account, so your lump sum grows over time. Your money is working harder for you over the term of the MYGA, and it is this tax-deferred growth that causes the assets of the MYGA to accumulate in the way that they do.
When a MYGA Is a Good Fit
MYGAs can be a powerful investment tool due to their tax-deferred growth. However, there are other benefits that make them a good fit for those looking to shore up their financial future. MYGAs are good for people who need to:
- Avoid the market: Unless you select a variable or indexed annuity, your MYGA will grow regardless of what the market does. A MYGA does not change with the stock market, so your money is protected even if the market goes down.
- Prepare for retirement: It can be difficult to know how much money you will need in retirement. A MYGA is a useful way to allow money to grow guaranteed while you determine your true financial situation post-work. From there, you can select further savings or convert the MYGA to recurrent annuity income.
- Leave money to grow: Managing a portfolio can be time-consuming, but MYGAs do not require active management. Simply invest your money and leave it alone to grow.
- You need money right away: In order to secure the best accumulation rates, you should be prepared to leave your money alone for some time. MYGAs take time to grow; if you need the benefits immediately, this may not be the right vehicle for your plan.
- You need access to your lump sum: Once money is invested in a MYGA, it is difficult to remove again. If you are able to remove it at all, there may be substantial penalties. If you may need this money sooner than the term, a MYGA may not be a good fit.
The Risks of a MYGA
MYGAs come with a range of benefits, but they are not for everyone. A MYGA might not be a good fit for you if:
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