What is a multi-year guaranteed annuity (MYGA) & how does it work?

The bottom line on MYGAs:

Your premium will earn a fixed rate of interest for the time period you choose.

They are tax-deferred so you will delay paying taxes until funds are withdrawn.

You can leave any remaining assets to beneficiaries.

When you're looking for investment solutions that offer stability and security—especially in an uncertain market—your options aren't just limited to CDs and high-yield savings accounts in retirement.

You may want to consider a multi-year guaranteed annuity (MYGA). It’s a fixed-deferred annuity that allows you to take advantage of a high interest rate environment with locked-in interest rates that are not impacted by market performance.

In this article, we'll cover:

• What is a multi-year guaranteed annuity?
• How does a MYGA work?
• What are the benefits of a multi-year guaranteed annuity?
• What are the drawbacks of a multi-year guaranteed annuity?
• What's a typical MYGA rate?
• How do MYGA withdrawals work?
• What happens when the term ends?
• MYGA vs. CD: What's the difference?
• Who should consider getting multi-year guaranteed annuities?

A multi-year guaranteed annuity is a type of fixed deferred annuity designed to avoid market volatility, offer tax-deferred growth, and provide a guaranteed income stream in retirement. MYGAs provide a locked-in, guaranteed rate of return for as long as the selected guaranteed period lasts, typically a period between three and nine years.

You purchase a multi-year guaranteed annuity through a contract with an insurance company. When you purchase a MYGA, you can choose a single premium amount that best fits your financial needs and goals. Minimum and maximum premium amounts vary by company.

The company you purchase your multi-year guaranteed annuity through agrees to pay you a fixed interest rate on your premium amount for your selected time period. You'll get interest credited on a regular basis, and at the end of the term, you either can renew your annuity at an updated rate, leave the money at a fixed account rate, elect a settlement option, or withdraw your funds.

• Guaranteed rate of return. Since a MYGA offers a fixed interest rate that's guaranteed for the contract's term, it can provide you with a predictable return.

• Protection from market volatility. With rates that are set by contract for a specific number of years, MYGAs aren't subject to market fluctuations like other investments.

• Tax-deferred growth. Like other annuities, you don't pay taxes until you withdraw money from your MYGA, so you can maximize your returns over time.

• Access to guaranteed income in retirement. MYGAs can be used as part of a retirement strategy, where you can elect a settlement option that can provide a steady source of guaranteed income for as long as you live.

• Leaving a legacy. You can leave any remaining assets to the beneficiaries you choose. These funds can be given to loved ones or to the causes you care most about.

• Limited liquidity. Annuities typically have penalties for early withdrawal or surrender, which can limit your ability to access your money without charges.

• Lower returns than other investments. MYGAs may have lower returns than stocks or mutual funds, which could have higher returns over the long term.

• Fees and expenses. Annuities usually have surrender charges and administrative costs. In addition, some MYGAs have a Market Value Adjustment (MVA). MVA is an adjustment—either positive or negative—to the accumulated value if you make a partial surrender above the free amount or fully surrender your contract during the surrender charge period.

• Inflation risk. Because MYGAs offer a fixed rate of return, they may not keep pace with inflation over time.

• Not insured by FDIC. Annuities are not federally insured like bank deposits and the guarantees are backed by the insurance company that you purchase your MYGA from. It’s important to vet the strength and stability of the company you choose. Look at reports from A.M. Best, Fitch, Moody's or Standard & Poor's.

MYGA rates can change often based on the economy, but they're typically higher than what you would earn on a savings account.

The 4 types of annuities: Which is right for you?

Need a refresher on the four basic types of annuities?
Learn more how annuities can guarantee an income in retirement that you can't outlive.

Compare the options

Some MYGAs allow you to take penalty-free withdrawals before the end of the contract period. Your withdrawal terms will depend on your exact MYGA contract, but generally, you can take out a certain percentage of your annuity's accumulated value each year without facing a surrender charge, sometimes called a "free surrender." Beyond that, withdrawals before the end of the term may involve fees and penalties that typically range from 1% to 10%.

When reviewing your MYGA withdrawal details, look for two common features: market value adjustment (MVA) and return of premium (ROP). These will affect how your funds are handled in certain withdrawal or surrender situations.

If your MYGA has market value adjustment provision and you make a withdrawal before the term is over, the company can adjust the MYGA's surrender value based on changes in interest rates. If rates have increased since you purchased the annuity, your surrender value may decrease to account for the higher interest rate environment. Conversely, if rates have decreased, the company may opt to increase your surrender value.

Including an MVA in the annuity contract helps the company protect itself from losses. However, it also allows the company to offer you a higher guaranteed interest rate because its risk is covered by being able to adjust values to match up with changes in MYGA interest rates.

The return of premium feature lets you receive your original premium payments back when you surrender the annuity if certain conditions are met.

This can be an attractive feature if you're concerned about needing access to all the funds due to an emergency. However, annuities with an ROP provision typically have lower guaranteed interest rates to offset the company's potential risk of having to return the premium.

Not all MYGAs have an MVA or an ROP. Terms and conditions depend on the company and the contract.

At the end of the MYGA period you've selected, you have three options:

If having a guaranteed interest rate for a set number of years still aligns with your financial strategy, you simply can renew for another MYGA term, either the same or a different one (if available). The rate for the new guarantee period will be based on rates available at renewal time.

With some MYGAs, if you're not sure what to do with the money at the term's end, you don't have to do anything. The accumulated value of your MYGA will move into a fixed account with a renewable one-year interest rate determined by the company. You can leave it there until you decide on your next step.

MYGAs offer contract owners the ability to elect a settlement option that can guarantee annuity payments for life or a specified period of time.

If a MYGA no longer fits with your financial strategy, you can withdraw its accumulated value at the term's end with no surrender charges. You might take it as a lump sum or partial withdrawals.

Unlike insurance products, certificates of deposit (CDs) are banking products. But both offer multiple guaranteed fixed rate options and are good options for guaranteed returns. However, there are some notable differences between the two:

• MYGAs generally offer a higher interest rate than CDs. While both offer guaranteed rates of return, MYGAs often offer a higher interest rate than CDs.

• MYGAs grow tax deferred while CDs are taxed as income annually. Annuities grow tax deferred, so you don’t owe income tax on the earnings until you withdraw them. This allows your earnings to compound over the term of your MYGA. In contrast, unless a CD is held in a retirement account (such as an IRA), the interest it earns is taxed annually. This reduces the potential for CDs to benefit from long-term compound interest.

• MYGAs are issued by insurance companies while CDs are issued by banks or credit unions.

• Both MYGAs and CDs typically have early withdrawal penalties that may impact short-term liquidity. With MYGAs, surrender charges may apply, depending on the type of MYGA you choose. So, you may not only lose interest, but also principal—the money you originally contributed to the MYGA. With CDs, interest rate penalties may apply for early withdrawals. This means you may lose interest but not the principal amount contributed to the CD.

Their conservative nature often appeals more to people who are approaching or already in retirement. But they might not be right for everyone.

A multi-year guaranteed annuity may be right for you if you want to:

• Take advantage of a guaranteed rate and lock it in for a period of time.
• Enjoy protection from market loss.
• Benefit from tax-deferred earnings growth.
• Have the option to select a settlement option for a guaranteed stream of income that can last as long as you live.

As with any type of savings vehicle, it’s important to carefully review the terms and conditions of the product and consult with a financial advisor to determine if it's a wise choice for achieving your individual needs and goals.