Taking charge of one’s financial wellness is a complex process that is unique to each individual, their circumstances, and their long-term goals. When deciding which financial products can help achieve these goals, most people will immediately think of stocks, bonds, and market-tied assets or real estate.
However, overlooking annuities during this phase can cause you to miss a powerful advantage in accumulating wealth. A multi-year guaranteed annuity (MYGA) offers numerous benefits, including tax advantages that increase the efficiency with which money can accumulate.
Here is an overview of the tax advantages of MYGAs for annuities by comparing the options available to high-income earners nearing retirement who seek secure wealth growth.
What Are the Tax Advantages of MYGA?
MYGAs function by allowing an individual to contribute a lump sum to the product, after which the money should remain untouched while it accumulates at the rate set forth in the contract.
The “guaranteed” element of a multi-year guaranteed annuity refers to the fixed rate, which will not change for the life of the product and ensures consistent accumulation.
Because of how a MYGA is structured, it is taxed in a manner that is substantially different from other products, such as CDs.
Tax-Deferred Growth
One of the biggest advantages of a MYGA is the tax-deferred growth. Many comparable products, such as certificates of deposit, require the owner to pay taxes each year on the amount of accumulation which is considered income.
However, MYGAs do not require any tax payments until the accumulation is received as income. This most commonly occurs at the end of the product’s term, when the original sum and the accumulation are released to the owner.
Tax-deferred growth allows you to keep more money in the product and accumulating, which favorably leverages your assets.
Up-Front Taxes on Interest
Another advantage of a MYGA is that taxation is transparent and up-front. Owners will always be aware of how much they will owe in taxes, because they will be able to predict (due to the fixed rate) how much their money will accumulate during the term.
This makes tax planning simple and easy to file come tax season.
MYGA vs. Other Taxable Options
The benefits of MYGAs are unique to this type of product, and many people wonder how they should incorporate one or more annuities into their plans. To make this determination, consider how other options compare.
MYGA vs. IRAs and Taxable Investments
MYGAs and IRAs utilize deferred taxation to increase the accumulative leverage of their funds. However, unlike IRAs, MYGAs do not have restrictions about income and filing status, which grants utility to a greater number of people.
IRAs and similar options, such as stocks, adjust based on market conditions, which means they function less predictably than a MYGA. Conversely, MYGAs do not track an underlying index, removing the risk that their value will decrease when markets drop.
MYGA and the Value of Penalty-Free Access to Funds
Another advantage of a MYGA is that funds are accessible according to the term of the product, regardless of age. A 401(k) will levy a fee when accessed before the age of 59 ½.
However, MYGAs can be acquired regardless of the owner’s age, though as with any source of income, MYGA owners will need to pay taxes on their accumulation. The MYGA keeps your funds more liquid at a lower cost.
MYGA’s Advantage in Estate Planning And Tax Efficiency
In terms of taxes, one element that many individuals fail to consider is what will happen to their estate when they pass away. MYGAs can help to avoid unnecessary taxation should the primary owner pass away.
What To Consider Legacy Planning and Efficiency
MYGAs can be purchased with beneficiary benefits that transfer ownership of the product to another person, such as a spouse. By avoiding probate, heirs are able to access the funds more quickly and with less complexity.
Because a properly constructed MYGA can transfer to a beneficiary in a straightforward manner, it is worthwhile to consider this type of asset among your retirement allocation.
Contact Pillar Life Today to Discuss Tax Strategies Through MYGA
A MYGA can be an effective means of deferring taxes to help your money accumulate efficiently and predictably.
However, the right retirement portfolio is just as unique as you are, which is why Pillar Life Insurance offers an online portal in which individuals can explore their options without pressure from a middleman.
Contact Pillar Life Insurance to discuss how MYGAs may benefit your planning, allowing you to make an informed choice about your future.