MYGA vs. other fixed annuities: Differences in timelines & payouts

Fixed annuities are a popular way to grow your wealth and receive a steady stream of income in retirement. However, you may want to consider a type of fixed-rate product known as a multi-year guarantee annuity, or MYGA.

A MYGA provides a guaranteed interest rate that works differently than some other fixed annuities. If you're trying to create financial security in retirement, understanding the differences between a MYGA vs. other fixed annuities can help you choose the best solution for your needs.

A fixed annuity is a contract between you and an insurance company that can provide a predictable stream of income in retirement. Typically, the insurer agrees to pay a guaranteed interest rate on your balance for the life of the contract. In addition, fixed annuities may pay a current rate which can be higher than the guaranteed interest rate.

Because the interest on your premiums isn't tied to the stock market's performance, fixed annuities often work well if you're retired or approaching retirement and want to grow your assets without market risk. However, these contracts may offer a lower average rate of return than some other asset classes over that long-term. In most cases, you can fund a fixed annuity with either a lump-sum premium or a series of premiums.

One of the advantages of fixed annuities is their tax-deferred status. You don't pay tax on any interest you generate until you receive distributions, enabling your assets to benefit from compound interest.

MYGAs are a type of fixed annuity that provide a set interest rate for a term length you choose, usually between three and nine years. Keep in mind that MYGAs, like all annuities, aren't a bank product but a contract with an insurer. You pay the insurer premiums and the annuity accumulates at that fixed rate until the term ends.

In the case of MYGAs, you pay a premium at the start—minimums and maximums vary by company—and the insurance company periodically credits your account with the promised interest rate for the duration of the term you've selected. At the end of the term, you may have some options for what to do with the money:

• Renew your contract. You may be able to choose the same or a different term and lock in the updated, current interest rate the insurer is offering.
• Receive cash. You can withdraw the accumulated value when your MYGA expires with no surrender charges. You can usually take the proceeds in a lump sum or make partial withdrawals. This will be a taxable event.
• Annuitize. You can elect to receive guaranteed payouts from the insurer that last for a specified period of time or for the rest of your life.
• Let the balance move to a fixed account. With some insurers, your MYGA's accumulated value automatically transfers to an account with a guaranteed minimum fixed interest rate. There may also be a current rate, which could be higher, that resets every year. You can usually leave your money there until you choose what to do with it next.

Having these choices at the end of the term makes MYGAs a flexible financial product, especially if you're near or in retirement and want to avoid market volatility for these funds.

While MYGAs are in the fixed annuity family, they work differently than traditional fixed annuities. Here are the main aspects that set the two apart:

When you purchase a MYGA, the insurer pays you a fixed interest rate for the term you elect, which is typically between three and nine years. One risk of a traditional fixed annuity is that a guaranteed minimum rate for the life of the contract and a current rate that will fluctuate. Therefore, your MYGA risks are lower than other fixed annuities in a declining interest rate environment. However, if you are locked into a longer period of years, a MYGA's risk may be higher in an increasing interest rate environment.

You can typically fund a fixed annuity with either a single premium or multiple premiums. In contrast, a typical MYGA contract is purchased with a single upfront premium.

Insurance companies impose a surrender charge on annuity contracts. Most MYGA issuers offer penalty-free withdrawals equal to a certain percentage of your contract value in each of your contract years within the surrender charge period. You only incur a surrender charge if your distribution exceeds this allowance. Keep in mind that withdrawals may be taxable. If you are under 59½ at the time of the withdrawal, in addition to taxes, there is a 10% federal tax penalty that will be applied to the taxable portion.

Some MYGAs have a feature known as a market value adjustment, or MVA, when you withdraw money from your annuity within the surrender charge period. Since interest rates have changed since the surrender charge schedule started, a market value calculation will cause an increase or decrease to your annuity's value. This MVA is designed to address the changing interest rate environment when you take money out during the surrender charge period.

A traditional fixed annuity can be a great option if you would like a guaranteed minimum interest rate for the life of the contract as well as a current rate that may be higher. Current rates typically change annually.

But if you would prefer a guaranteed fixed return for a specified number of years, you might want to consider a MYGA. While often compared to CDs, these fixed annuities may provide higher interest rates and tax-deferred growth that bank CDs don't offer. However, annuity withdrawals may be subject to surrender charges which could be up to 9% of the withdrawal. Be aware that this is much higher than the interest penalties that CDs impose for early withdrawals. Do not purchase an annuity if you believe you will need the money prior to the end of the surrender charge period.

A Thrivent financial advisor can help you determine the benefits and risks between your various retirement savings options so you can feel confident about the path you choose.