Tax and Principal Advantages of a Multi-Year Guaranteed Annuity (MYGA)

Follow the Pattern-Define Your Financial Desires, Dig into the Details, then Decide
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A financial plan is a system that allows all the parts to contribute to the success or failure of the whole plan. Planning is the act of projecting forward to what we want to build financially. There are eight components for constructing a financial plan, two often get overlooked. The first is becoming a conscious financial consumer, and the second is defining the purpose of each goal. Emotions and logic play a major role in the decisions of a financial consumer.

Strong motivating emotions can usually be boiled down to fear and greed. They create internal conflict during the purchasing process. Advertisers want to stir your emotions and make your logic fuzzy. This explains why the most common phrases used to sell products are financial loss and financial performance. Knowing what you want makes it easier to filter through the sizzle to find the steak. Only then will the planning process and financial future be run with clarity instead of emotions.

Are You Looking for Guaranteed Principal Return and Growth?

In order to achieve your financial plan you have to purchase products that meet the purpose defined. One purpose in a financial plan is guaranteed principal and growth of assets. A Multi-Year Guaranteed Annuity (MYGA) is one consideration that brings concrete answers to the projection of growth. The reason is that a MYGA has a guaranteed rate of return per annum for a specific period of time.

Thus, calculated future growth is guaranteed. In addition, the earnings, or growth, is tax-deferred for non-qualified accounts. This simplifies the planning process for calculating how much money you will have over a specific period of time, and guarantees what assets you will have at the end of the period.

A Multi-Year Guaranteed Annuity Is a Straightforward Product With Limited but Guaranteed Growth

By definition, you can now determine if a MYGA fits in your financial plan. If you goal is to accumulate $1,000,000 for retirement income, the calculation becomes straight forward with a MYGA. The simplicity of this annuity contract allows you to know with certainty how much money you will accumulate over a specific period of time.

Learn the Product Details and Be Aware of Your Emotions

It is important to define exactly what you want to a product to do. Thankfully, a MYGA contract has limited options and each is very definable in relation to your purpose. Ask yourself the following questions to provide the needed insight to make a clear decision: 

  • Do you know how much money you need to accumulate?
  • Do you know the time frame during which you want to accumulate the money?
  • Do you want growth to be tax-deferred?
  • Do you want to ladder, or stagger annuity maturity dates to address inflation?
  • Do you want the money to go to a named beneficiary if you die prematurely? 

Defining the Advantages of a MYG A Also Clarifies Whether It Is a Product Right for You

  • MYGAs offer deferred guaranteed growth.
  • There are options for duration of the growth period of a MYGA.
  • Qualified and non-qualified money can be used to purchase a MYGA
  • MYGAs have no ongoing fees.
  • A simple plan for future growth can contain a MYGA without becoming overly complex.
  • You or a beneficiary will receive contractually guaranteed payments. 
  • MYGAs can provide a guaranteed death benefit to your spouse or other beneficiary.

If the lack of principal risk and guaranteed growth rate satisfies your logical and emotional thought process, then a MYGA may be a perfect fit.

It Is Equally Important to Define the Disadvantages of a MYGA

  • The biggest drawback is the lack of liquidity during the defined period of the contract. You transfer a lump sum of money to the insurance company for a guaranteed period and a guaranteed return, or in other words you forfeit control during that period.

Rates of returns are generally equivalent to 10-20 year treasury bonds.

There is a 10% IRS penalty for early withdrawal (before 59 ½) on the growth portion of the account value. This brings up the issue of fear and greed. Can you emotionally deal with the greed factor of not being invested in the stock market despite having no risk or volatility? And, can you logically and financially make that decision? If the answer is “no” and you are willing to take on the risk of managing your own money then a MYGA will not fit your logical and emotional needs. It is best to pursue other avenues.

There Is a Defined Pattern to Follow As a Financial Consumer

Weighing out the advantages and disadvantages is part of the process of being a financial consumer. Knowing your purpose makes the process of achieving your financial plan doable. If you fail to pacify both sides of your brain the final decision will be elusive and result in poor decisions being made. Know what you want, define your purpose, learn the details, and then make the decision. Most importantly, don’t allow fear or greed to be the determining factor. Buy the steak because it fits your needs and plans… not the sizzle.

Further Reading

Read Stan's article How Can I Lock in a Future Income Stream to broaden your base of knowledge about income later options. Still left wondering about annuities effectiveness? Read Dana Anspach's article What Is an Annuity Really Good At? 

If you think you are ready for an annuity, be sure to read Stan's article How to Figure Out if You Need an Annuity.