Though I’ve previously warned against many annuities, with good reason, this column will focus on one type of annuity that might serve a very good short-term purpose in your financial plan.
That product is a fixed-rate multi-year fixed-rate guaranteed annuity – or MYGA. With a term ranging from 3 to 10 years, this insurance contract promises a fixed rate of interest for that period. Currently many offer a temptingly high rate of more than 5.50%!
Now that I have your attention, let me tell you what is involved – and what is NOT part of this interesting deal.
This is NOT an immediate annuity, which is a lifetime promise to pay you a fixed sum of money as long as you live.
This is NOT an annuity that is linked to promises of upside stock returns and no downside. (Avoid those like the plague; they’ll be the subject of a different warning column.)
But what we ARE talking about today is the insurance industry’s version of a CD. A MYGA promises to pay you a guaranteed rate of interest for a set number of years. However, the guarantee comes from a highly-rated insurance company, not the FDIC.
Because this is an insurance contract there are some interesting tax benefits – as well as some potential drawbacks.
Here are some key points to keep in mind with a MYGA contract.
1. You can purchase them inside your IRA, or in your own or joint name.
2. If you purchase in your own name, the interest can compound in the insurance contract, with no taxes paid until you cash in the annuity at the end of the contract. At that point, the interest will taxed as ordinary income.
3. If you purchased the MYGA inside your IRA, there are no tax considerations, since eventually all IRA withdrawals are taxed as ordinary income.
4. At the end of the MYGA guaranteed period – 3-10 years – you can “roll over” (in insurance contracts this is called a 1035 Exchange) into a new MYGA (if you like the rates at that point), with no taxes due. Or at the end, you could even roll the whole amount tax-deferred into an immediate annuity – which will start paying you a (partially taxable) fixed check for life.
5. Some MYGAs will allow you to withdraw the interest earned (taxed as ordinary income) along the way. Some offer the opportunity to withdraw perhaps 10% of your money once or twice during the contract period. But, in general, you should think of this money as “locked up” for the term you choose. That’s why you must choose carefully!
So how do you choose? And how do you know which of these contract details buried in the fine print must be considered? The critical element is not just the promised rate, or the rating of the insurance company – but other promises inside the contract around how the interest is paid and how it can be withdrawn.
The insurance industry just announced record sales of these MYGA annuities in 2022 – as people searched for higher rates than bank CDs. In the 4th quarter of 2022, sales were up 241% from a year earlier.
Despite that volume, you won’t find a lot of “chicken dinner” seminars touting these products. That’s because the built-in commissions are so low compared to the annuity products that offer some kind of link to stock performance. And because, the insurance companies change their rates so frequently – depending not only on Fed actions, but the insurer’s own capacity.
Stan Haithcock of www.StantheAnnuityMan.com, maintains a live database of these fixed rate guaranteed annuities on his website. Since insurance contracts are state-regulated, you have to input your state of residence and the “term” – the number of years – you are locking in, likely from 3 to 10 years. Instantly you’ll see offerings – mostly ranging between 5.30 to 5.6% as this column is written. The table shows other details, such as allowed withdrawals, minimum investments – and insurance company ratings. Plus, you can get personal advice before buying. And this website has free videos and podcasts, explaining terms and products. (I’ve been a recent podcast guest.)
Just like shopping for bank CDs, you need to do your homework. Yield isn’t the only consideration, but for a portion of your “chicken money” this product could give you a nice return. And that’s The Savage Truth.