When it comes to choosing the right annuity for your retirement, you might find yourself wrapped up in all of the terminology. Fixed annuities? Fixed rate options? MYGAs? Understanding the differences between the wide variety of choices is the first step to making a solid financial plan for your future.
Among the most nuanced, and often times compared, annuity products are a MYGA vs Fixed Annuity, terms which many people use interchangeably. However, these two items are different, and one of them may be a better fit for your overall strategy than the other. Here’s what you need to know about their differences to make the right choice for your situation.
How Does a MYGA Work?
A MYGA, or multi-year guaranteed annuity, is basically the annuity version of a certificate of deposit (CD). You take a lump sum, place it into a MYGA, and let it grow over time accumulating at a guaranteed rate. The MYGA does not track the stock market, removing the concern about possibly losing money when stock prices fall.
However, as with CDs, MYGAs are strict about leaving the money alone, and you will not be able to withdraw the balance earlier than the agreed time frame without paying significant fees.
What, then, is the difference between a MYGA and a CD? It all comes down to the details, primarily, taxation. If you put your money into a CD, you will pay taxes on anything that you accumulate each year; however, a MYGA only taxes you on earnings once the term is over. This is referred to as a tax advantage or a tax deferred option.
MYGAs allow your money to work harder for you by keeping the balance as high as possible at all times.
What Does a Traditional Fixed Annuity Do?
Traditional fixed annuities are one of the most common types of annuities that people use to fund their retirements. A traditional fixed annuity operates on a fixed rate in contrast to variable rate products, where the rate may go up or down according to the underlying index or market tracking.
Similarly to a MYGA, a fixed annuity is funded with a lump sum after which it will begin paying out according to the terms of the contract. Often this means that payments begin soon after origination, but some fixed annuities can defer their start date into the future.
Once payments begin, they will continue for the duration of the annuity’s term. Some fixed annuities will only last for a few years, while others can be used to provide payments for the rest of an individual’s life.
MYGA vs Fixed Annuity: Which Is Better?
Because MYGAs and traditional fixed annuities both offer a place to store and accumulate money at a fixed rate, many people struggle to tell the difference. However, if you are caught in the debate of MYGA vs fixed annuity, understand that their functions are different.
MYGAs are a type of fixed annuity, but they do not pay out the way other annuity types do. Your money will sit undisturbed, and you should expect not to access it for the duration of the term. They are intended to help your balance accumulate.
Traditional fixed annuities, on the other hand, will pay out on a schedule. For this reason, many people choose to use a MYGA until they are ready to retire, then convert the MYGA into a fixed annuity going forward. This allows them to benefit from tax-deferred accumulation until they need the money.
As for which product is the right choice for you, consider your risk tolerance and horizon. If you can tolerate greater risk, a variable annuity may be a worthwhile option to consider before locking into something with a fixed rate. However, if you are approaching retirement or the time in your life when you will need to access your money, a fixed rate product is more secure against market shifts.
Utilizing a MYGA to hold and grow your money until you need it can be a smart option, as is rolling the MYGA into a fixed annuity when you are ready to accept payments. Just make sure that the term of the MYGA aligns with your goals; otherwise, your money may be committed to the MYGA for longer than you intend.
Select the Right Annuity for Your Needs Hassle-Free
You understand your unique and personal financial needs. For this reason, Pillar Life Insurance offers an online portal where you can make annuity choices yourself, without the need to consult with an agent. Take a look at the online website to review the annuity offerings and get started planning for your future.
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