Update 9/4/24: readers discovered that there are some annuities which are taxed immediately each year and those might not have the 10% penalty for those who are less than 59 1/2 years old. Some of these offer better yields than long term CDs, so these might be something to think about.
Original Post 5/20/22:
A reader recently mentioned using fixed annuities called MYGAs (Multi-Year Guarantee Annuity), or CD annuities, as an alternative to the traditional CD. Let’s take a quick look.
Here are two lists (link, link) you can look through to get a feel for the rates offered on MYGAs.
MYGAs are quite similar to traditional CDs in that you deposit a certain amount of money for a fixed amount of time and you get the money back with the interested added on top after the fixed timeframe. Like CDs, your money is often locked up for that fixed timeframe and you may have to pay a penalty or lose the interest gains if you withdraw before the agreed timeframe.
The primary way that MYGAs differ from traditional CD’s is that they are issued by insurance companies instead of banks. This means there’s no FDIC insurance backing you up in case of default. Most people will only buy an annuity from an insurance company highly rated by respected rating agencies.
(It’s worth noting that you aren’t entirely dependent on the insurance company going under water since all insurance companies are required to belong to a state guaranty association. These associations guarantee balances up to the state’s statutory limit, typically $250,000. As I understand it, you won’t really lose money unless all insurance companies in your state go bankrupt since they are all ‘tied together’ to cover each others balances. Still, for larger investments, it’s definitely important to research the insurer well and make sure they are top rated.)
The most important distinction, though, between CDs and MYGAs is that the latter is meant as a retirement product, and thus comes with is a 10% penalty for withdrawals made before the age of 59.5. Someone who is currently 50 and wants to buy a 10-year MYGA won’t have any penalty issues given their 60 year age at time of withdrawal. Often the MYGA rate might be high enough to be worth buying even after factoring in the 10% penalty.
MYGAs are typically between 3 and 10 years. Interest gets compounded annually. Each MYGA will have a different minimum investment amount, e.g. $10,000 or $20,000 or more.
A major advantage to MYGAs is the ability to continually renew the annuity (or even exchange it directly into a new annuity) and take all of the gains at a future date of your choosing, thus delaying a taxable event until a more favorable time.
It’s important to note that there are all types of annuities out there, some of which are variable or tied to the stock market, some which pay out in monthly increments, etc, etc. Here we’re only discussing fixed annuities which offer a fixed return percentage for a set number of years and operate much like a CD with an initial deposit and a payout at end of term. Before locking into anything, be sure to do your research in understanding the product offered.
Conclusion
In the end, there are a few scenarios that MYGAs make sense:
- MYGAs can make sense as a retirement plan and a means of getting a predictable income stream in those years. (Of course there are many other types of annuities which work well for retirees as well.)
- They can also make sense for someone who plans to hold cash for many years and who doesn’t plan on needing the cash any time before they are 59.5 years old.
- Finally, an MYGA can make sense for anyone as a means of holding cash if the rates are significantly above traditional CDs. The MYGA rate might be superior to CDs even when factoring the 10% penalty.
Often, there can be a mixture of the above scenarios which can make an MYGA useful, especially after factoring in the tax deferment flexibility that these annuities offer.
Feel free to chime in below with your own thoughts or corrections. Also, please let me know if you find this kind of content useful which we’ll keep in mind for the future.
Related:
- Wow! US Treasury Bonds Rate Set To 9.62% (I Bonds)
- Pondering US Treasury Series EE Bonds (3.5% APY Return With 20 Year Lockup)
- Exploring Brokered CDs
does anyone know if annuities are ALWAYS taxed? meaning, for example, I’m 52, living off savings, no income, therefore I pay no taxes, due to the income i have from bonuses and cd interest isn’t high enough to be taxed. If I bought an annuity now, at age 52, would I have to pay any taxes or penalties on an annuity? I’m interested in buying some annuities, but not if there’s automatically a tax on them. And do I still have to worry about 59 1/2 age? I just really don’t understand how this works.
Here are two posts that I wrote that you might want to read:
Canvas MYGA #1781201 , which is tax deferred meaning you won’t get taxed on the interest until you withdraw it and yes, there are penalties if you withdraw anything prior to 59 1/2.Gainbridge Fastbreak MYGA #1835854 which is taxed annually, just like a CD. This MYGA is useful for someone who is younger than 59 1/2 looking for a better return than most CDs with the ability to withdraw up to 10% of the policy value annually after the 1st policy year. So, it sounds like this might be something for you to consider.
tuphat Just posted #1969418 about an increase in the Gainbridge rates.
Bottom line: Don’t rush into purchasing a MYGA until you understand what your buying & what it will and won’t do for you. You don’t want to lock up funds you’ll need during the contract period. The rule of thumb is not to invest more that 50% of your liquid funds.
I bought my annuities primarily for principal protection and for the contractual guaranteed rate of return & to help control my taxes as needed.
You also might want to visit Stan the Annuity Mans website. Lots of entertaining/informative videos and educational material.
This comment must have been in moderation or something. I only just now received the email notification for this one, AFTER i received your repost of it, below it. Even though this one is dated yesterday. Lots of comments going to spam and moderation. I had 3 go earlier today when discussing the treasury direct funding. Anyway, thanks paul, I appreciate you.
Interest earned on an annuity is either taxed when withdrawn or taxed annually just like a CD. If you wanted an annuity to be tax free, it would have to inside a Roth IRA.
Here are two posts you might want to read:
Bottom line: Don’t rush into purchasing a MYGA until you understand what your buying & what it will and won’t do for you. You don’t want to lock up funds you’ll need during the contract period. The rule of thumb is not to invest more that 50% of your liquid funds.
I bought my annuities primarily for principal protection and for the contractual guaranteed rate of return & to help control my taxes as needed.
You also might want to visit Stan the Annuity Mans website. Lots of entertaining/informative videos and educational material.
I was thinking of the 10 year annuity because rates will probably drop to 2% or lower like what we were getting before. I would like to lock in rates while rates are higher.
The amount of money I was thinking of putting in is only $100k. I have no income, so I only pay taxes on my cd interest and bank bonus interest. That amount is always lower than the standard deduction so I don’t ever have to pay taxes.
When I used to have mutual funds, there was a mandatory 20% capital gains tax i had to pay. What i was asking, is an annuity taxed like interest on a cd, which would mean I would owe no taxes, or is it taxed similarly to mutual funds, where you pay taxes on it regardless?
For your age, you would get a Gainbridge MYGA. You won’t have to pull out any interest, unless you want to, because you will get a 1099-INT every year, just like a CD.
Like a CD there are penalties if you withdraw more than 10% each contract year, or if you need the funds and have to surrender/cash out the contract. I don’t have that info in front of me, but you can view it on their site.
Thank you paul. You’ve been a wealth of knowledge on this topic, and I really appreciate you sharing it all here.
Im not sure I will do it, but I’m strongly considering it. I remember for so long, just 2% interest rates. It seems great to lock in high rates for 10 years, but I have always just used hysa instead, and recently, cds, but those are all short term ones.
It seems silly for me to NOT lock in high rates for 10 years but at the same time, it also seems silly TO lock in rates for 10 years. Hope that comment makes sense.
Just like CDs, you could create a MYGA ladder 3,5,7,10 etc. and spread the money out. Just food for thought.
PSA : For those who invested in the Gainbridge Fastbreak MYGA, December 16 is the last date to request withdrawal (interest or partial) for this tax year.
You have to call in and they will email you an online withdrawal doc to sign and submit.
I think I’m little bit late in the game. Anyway, does anyone have good products on annuities with tax deferred currently? Thanks in advance!
Future Fund
3 Year Term 5.75%
5 Year Term 6.00%
7 Year Term 6.05%
Flex Fund
3 Year Term 5.25%
5 Year Term 5.50%
7 Year Term 5.55%
Lots of info in this post about Canvas and it’s Multi-Year Guaranteed Annuities (MYGA). I own three.
Thank YOU so much PaulinTexas! The rates are very attractive. I’m planning to purchase some.
I purchased two today. Thanks again! I know this post is for MYGA. But do you know any good fixed indexed annuities by any chance? Thanks in advance!
Here’s one of his videos on Fixed Indexed Annuities –Hidden Truths & Facts About Fixed Index Annuities: Shootin’ It Straight With Stan
As you proceed, please provide an update on your journey 🙂
Thank you so much for the information! I will take a look his YouTube channel and site!
Updates: I purchased another annuity from Oceanview Life and Annuity Company. It’s a 10-Year Harbourview Fixed Indexed Annuity with 9.75% Fixed Rate for the first year. Several strategies can choose from on annuity anniversary. By the way, SP500 and Nasdaq cap is 10.75% currently. Of course, they can be changed anytime.
I watched Stan’s some videos and learnt a lot from him. For the one I purchased, a friend of mine mentioned it to me, then I did some research as well. Thanks!
At the end of 5 year (say have a 5 yr contract), what is the renewal rate for Gainbridge and Canvas annuity? I didn’t find this info except that it might be auto rolled into next term by default.
I think it’s important to set yourself a reminder 30 days ahead of contract maturity, to make sure you don’t get blindsided by automatic renewal. My sense is that the post-maturity grace period familiar in the CD World isn’t as readily available in MYGA World.
FWIW — Thanks in part to some very helpful info from commenters below, I went from a MYGA skeptic to a believer. My personal profile: over 59.5 yo, looking to invest cash that otherwise would likely go into CDs, trying to lock in favorable rates. Because of a concern about creditworthiness of issuers, I wound up having phone discussions with directors of two state guaranty associations (my state and my mom’s), who answered questions, provided some generic advice, etc.
;tldr — Thanks to everyone here that helped educate me. “You don’t know what you don’t know.”
Which insurance companies did you buy your annuities from?
Apologies for delayed response. I went with Gainbridge.
Got an email announcement from Canvas that rates are dropping on 1 October. The new rates will be:
Canvas Future Fund:
3-yr – 6.20% No Change
5-yr – 6.25% currently 6.35% (-.10%
7-yr – 6.30% currently 6.55% (-.25%)
Canvas Flex Fund
3-yr – 5.65% currently 5.75% (-.10)
5-yr – 5.70% currently 5.90% (-.20)
7-yr – 5.75% currently 6.10% (-.35)
A couple of strategies:
I decided to take my own advice – P2 just applied for another Canvas 7-yr, 6.55% Future Fund Annuity. This is a Multi-year Guaranteed Annuity (MYGA) that protects your principle and contractually guarantees the interest rate for the contract term. This annuity is designed for folks who will be at least 59 1/2 before they make any withdrawal.
Applied via Applicant Portal instead of Fast Application. Why? So, the funding method could be changed from Wire or Check to ACH (Plaid) once funds are available. ** Warning ** If you apply using the Fast Application, you cannot change funding methods and would have to reapply and get the rates that were then available.
Your last day to get the current rates is 9/30 – then they drop. Here’s an example of the interest impacts based on a $100,000 Annuity.
% —— Annual —— Monthly ——–1yr Diff — —-7yr Diff
6.55 — $6,550 —— $545.83
5 ——- $5,000 —— $416.67 ——- $1,550 ——- $10,850
4 ——- $4,000 —— $333.33 ——- $2,550 ——- $17,850
3 ——- $3,000 —— $250.00 ——- $3,550 ——- $24,850
Were already at or below 5% and it’s only going down from here.
You can also withdrawal up to 10% of you contract value each contract year w/o paying any surrender charges.
Well, I just opened a 3 year MYGA with Gainbridge. I’m 47 and one of my CDs matures this week, so I’m parking that same allotment into the FastBreak option. This is new territory for me, so I’m treading carefully. The application process went smoothly. I’ll provide updates if I run into any unforeseen issues.
Jared, I was wondering if you could elaborate on your experience opening the annuity with Gainbridge. Did your process continue to run smoothly?
It took 3 full business days for the account to fund via Plaid, but they mentioned that would be the case right after I initiated the deposit, and I would not lose out on any interest for those 3 days, which I didn’t. So, it did go smoothly.
My experience w/ Gainbridge similar: smooth but a little slow in funding. Per discussion w/ their CS desk, rate is locked on application date.
Canvas has B++ credit rating (“Good”) from AM Best. What’s that mean in practical terms, other than it’s not as good as “Superior” or “Excellent,” but it’s better than “Fair”?
In bond terms, I don’t think it would be considered investment grade.
Also, FWIW — For a broad comparison, I took a look at IBHH, which is the iShares 2028 fixed duration ETF for BBB/HY bonds. It’s got an avg YTM of 6.91%, a WAM of 3.13 yrs and an underlying portfolio of 237 issuers, none of which make up over 2% of total. So … purely in terms of credit quality/default risk, IBHH’s diversification makes it a better bet, imho.
A bond wouldn’t be insured to $250k.
Neither are MYGAs issued by companies like Gainbridge and Canvas. As the latter’s website says, they’re “backed by the financial strength of the company” — like a bond.
Check with your state. Mine and most others insure these MYGAs up to $250K. California is less.
Similar to FDIC for banks, but this is by state instead of federal. That’s what makes them comparable to CDs.
Bonds have no such insurance so they are not comparable.
Thanks for the insight & education.
Also, FWIW & on further research — In my state (Virginia), insurance companies & their agents are prohibited by state law (§38.2-1715) from advertising, or making any written or oral statement, with respect to coverage by the guaranty association. File under: Best Kept Secrets?
Here is a link you might find useful:
The National Organization of Life and Health Insurance Guaranty Associations
https://www.nolhga.com/home.cfm
My state is also $250,000. Note, this is per person, per insurance company. So, if married, each spouse could be insured for up to $250,000 with the same insurance company. For additional MYGA insurance coverage, you would need to purchase from an additional company. I ladder these products as part of my fixed income strategy – treasuries and CD’s for shorter maturities, MYGA’s for longer maturities.
Reposting this from Best High Yield Savings Account
Lots of talk about buying CDs sooner than later due to interest rate going down. Another option is a Multi-Year Guaranteed Annuity (MYGA). This insurance product acts like a CD but has additional benefits.
The info below is current as of 9/5/2024.
Canvas – Future Fund 3yr 6.2%, 5yr 6.35%, 7yr 6.55% – tax deferred for ages 59 ½+ by maturity date. Can also have a Roth Annuity for tax free gains.
Go to this post to learn more: https://www.doctorofcredit.com/high-interest-savings-to-get/#comment-1781201 – go to bottom of post and click on Read more >> – it formats the post so it’s easier to read
Gainbridge – Fastbreak 3yr 6%, 4yr 6.1%, 5-10yr 6.15% – interest is taxed & 1099 issued yearly – Good for anyone, especially those who haven’t reached retirement age
Go to this post to learn more: https://www.doctorofcredit.com/high-interest-savings-to-get/#comment-1835854
With regard to Gainbridge fastbreak, what does the following mean for folks withdrawing only the interest yearly and withdrawing the principal at end of term (say 5 years)
“In addition, this annuity will do a Market Value Adjustment (MVA) to “adjust” the final sum of the payout. MVA is based on the current interest rate versus when you purchased the contract. If interest rates are now higher, they pay you less, if rates are lower, they pay you more.”
Here’s what their contract says:
“We will not apply the Market Value Adjustment to (i) any amounts withdrawn during the current Contract Year that are, in the aggregate, less than or equal to the Free Withdrawal Amount, (ii) any amount applied to the funding of a Settlement Contract in connection with an annuitization of this contract, (iii) any amounts withdrawn within 30 days before, and including, the end of a Guaranteed Interest Rate Period, or (iv) Death Benefit payments
If either of those conditionals occur, the sum that exceeds your you will be charged a surrender fee (based on the year) and the funds that exceeded the 10% will be adjusted based on the MVA.”
Also excluded from the MVA is the Nursing Home Confinement Benefit.
Thanks for the clarification. I just signed up to lock in the 6.15 rate.
On a side note, how easy is it to request the withdrawal of yearly interest ? I think canvas allows it to be requested online.
Will do :). As an aside, they automatically pull the funds even for manually entered/verified bank accounts, so make sure the funds are present when you verify the account. I was expecting an option to schedule the pull.
A bit time consuming to take an annual interest (or up to 10%) withdrawal from Gainbridge. Cannot do it by yourself online. Must call Gainbridge and speak to a CSR and request that the withdrawal form be securely emailed to you. (Sometimes, it is a long wait to speak with a CSR.) Then, it will take 1-3 days for them to confirm receipt of your withdrawal request, and another 3-10 days to receive your money.
Yes, the process at Canvas is much simpler. Canvas provides an online form that you can complete anytime after your MYGA contract has been approved. Also, it is more flexible than Gainbridge. Canvas allows distributions monthly, quarterly, semi-annually or yearly, and you can select the date of the month you want to have the ACH processed.
Update as of 9/27 – Gainbridge Fastbreak rates have dropped significantly
Old 3yr 6%, 4yr 6.1%, 5-10yr 6.15%
New 3yr 5.4%, 4yr 5.45%, 5-10yr 5.5%
The “best” annuity is the IRA Charitable Gift Annuity (SPIA) that can satisfy your RMD! $53K this year. Some think that $53K is the max but does not have to be done in one year
Charitable gift annuities are a one shot operation. https://www.kitces.com/blog/charitable-gift-annuity-cga-legacy-ira-rollover-secure-act/
Good point about one-shot nature of this approach, also flexibility trade-off. Simple example with round numbers:
You anticipate being over IRMAA limit by $10k each year for next 5 yrs, after RMD but before any QCD. Maxing out a CGA in Year 1 would certainly get you below IRMAA limit for that year, but there’s no carryover for the “unused” headroom AFAIK. In contrast, making a $10k QCD each year 1-5 would get you under the IRMAA limit each year.
Caveat: I’m not an expert, feel free to correct.