Planning for retirement means choosing investment instruments that will give you a steady supply of sufficient cash to finance your retirement years, such as annuities.
A new form of annuity known as a MYGA has some fantastic advantages. They are more stable than many other forms of retirement-focused investments, and they offer significant tax benefits as well.
Let’s take a closer look.
What Is a MYGA?
All annuities are essentially contracts with an insurance company. The company you make the agreement with invests your money and gives you income once the accumulation phase of the annuity has expired.
Variable annuities, tied to market performance, offer the potential for greater returns at the cost of greater risk. The risk increases during extended periods of market turbulence.
To mitigate risk, insurers offer fixed rate annuities, instruments that lock in a guaranteed interest rate over part of the accumulation phase of the annuity.
A MYGA (multi-year guaranteed annuity) is essentially a type of fixed rate annuity. However, MYGAs offer certain benefits over other types of fixed rate annuities that make them a potentially higher-earning investment – without the risks that come with variable annuities.
What Are the Advantages of a MYGA?
Fixed rate annuities typically only offer the guaranteed interest rate for part of the accumulation phase. They offer little to no protection against inflation, and they come with steep tax penalties against early withdrawals.
In contrast, a MYGA guarantees you that rate for however many years you spend contributing to that annuity. You get stability and predictability in the face of market fluctuations, plus good returns.
Moreover, MYGAs are tax-deferred, meaning that you only get taxed when the annuity is liquidated, and you are paid out the money (as opposed to paying tax during the accumulation phase).
But why does it matter when you pay the tax?
Tax Deferment and Compound Interest
A MYGA works with compound interest, meaning that the interest you’ve already earned is added to the principal (what you pay in). In other words, as the principal grows, any additional interest is calculated on the larger principal, rather than the original sum.
Traditional fixed annuities are taxed as they grow, which impedes the speed of their growth, and thus limits their final value.
In contrast, a MYGA keeps compounding and growing on the compounded principal, all at a guaranteed interest rate. Catch the market when the interest rate is high, and you could see your principal grow enormously.
Consult a Professional
Whatever investment instruments you choose, being well-informed is your best asset when making decisions about your financial future.
As with any investment decision, contact a financial professional to advise you on investing with a MYGA. You’ll benefit from expert insight into the current market, as well as personal recommendations based on your individual financial profile and goals for retirement.
MYGAs for a Stable Retirement: Our Takeaway
Everyone’s financial situation is unique, and the best retirement strategy for one person may not be the same as another’s.
Talk to your financial advisor about MYGAs to decide whether they or another type of annuity may be right for you.
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