Multi-Year Guaranteed Annuities, or MYGAs, are short-term low-risk investments, where your money accumulates over a fixed period of time at a guaranteed rate. They operate much like CDs with additional options and benefits geared towards retirement, including tax-deferral of gains and the option to annuitize (generate a stream of regular payments) upon maturity. Depending on your age and goals for the proceeds of your MYGA, you can do any of the following at the end of the contract:
- Take a lump-sum withdrawal (cash out)
- Leave money invested and withdraw periodically or according to a schedule
- Annuitize by creating a permanent stream of guaranteed income that could last for life
- Rollover via a 1035 exchange into a new MYGA or other annuity
Here’s why someone would choose each of these options:
Take A Lump-Sum Withdrawal (Cash Out)
Once you reach the end of the MYGA’s investment term, the money is yours. If you’re at least age 59½ and plan to use the money now, you can cash out entirely. However, if you’re younger than 59½, it isn’t ideal to cash out because the government will impose a 10% penalty on the gains. This penalty is the flip side of the tax-deferral you’ve been receiving, a benefit afforded by the government to encourage retirement savings. As such, they want to make sure you are actually using the money in retirement.
Leave Money Invested
A MYGA maturing doesn’t mean that a check will automatically be mailed to you. In fact, unless you take action, the insurance company will continue to invest your money, but you’ll earn a significantly lower renewal rate going forward. This might make sense if you plan to use the money in the very near future, in which case you can withdraw it as you wish or according to a schedule. In the majority of cases, this is not the ideal approach.
At the end of the guaranteed period, you’ll have the option to renew for another guaranteed interest rate period. You’ll be offered new crediting rates according to according to the new term selected, which may be higher or lower than your prior rate depending on market conditions. This is a good option for someone under age 59½, who can’t cash out without incurring a governmental penalty but plans to use the money shortly after turning 59½.
Annuitize To Create Guaranteed Income
The true meaning of an annuity is a stream of regular payments made in exchange for an upfront premium. Income annuities do this and only this, whereas MYGAs and other accumulation annuities offer first and foremost opportunities to grow your assets, followed by the option but not obligation to turn those assets into a guaranteed income stream. This is a great option for someone looking to generate steady income in retirement that they can’t outlive. It’s also a way for younger MYGA owners to get around the pre-59½ early-withdrawal penalty. The Substantially Equal Periodic Payments (SEPP) exemption provides early access to your retirement funds if annuitized. Before you decide to annuitize, compare the income benefit being offered by your insurance company with others currently available in the marketplace. You can run your own quotes here.
Rollover Into A New Annuity
One final option is to rollover your maturing MYGA into a new annuity, penalty- and tax-free through a 1035 exchange. This new annuity could be another MYGA that offers a better rate than renewing your current one. Or, it could be another type of annuity: variable, fixed indexed, or income. Variable and fixed indexed annuities offer a different, and in our opinion unappealing, take on accumulation. Income annuities, on the other hand, are used to turn your assets into retirement income you can’t outlive, much like the annuitization above described above. The reason you’d buy an income annuity instead of annuitizing is to either (1) get better rates, or (2) delay the start of your income stream, which will increase the monthly or annual payments you receive.