Why You Should Consider a MYGA instead of Bonds
Annuities have a bad rap.
A MYGA (Multi-Year Guaranteed Annuity) may have a place in bucket 2 as Buffer Assets. Are MYGAs a consideration instead of bonds?
Sometimes called fixed rate or CD-type annuities, they have a 3-10 year deferral and then pay out a lump sum depending on the contract guaranteed by the insurance company.
Note that these are “good” annuities without large expenses. MYGAs are annuities that you buy, whereas Fixed Indexed annuities and Variable annuities are SOLD to you (with high fees and pressure).
Of course, there are surrender charges. MYGAs are accumulation annuities. Therefore, at the end of the period, you can cash out or 1035 exchange to a different annuity.
Other good annuities are usually for income (Single Premium Immediate Annuity) or for longevity insurance (Deferred Income Annuity or Qualified Longevity Annuity Contract).
When you are building your bond ladder, should you consider a MYGA as a rung?
Taxation of MYGAs
Taxes for MYGAs are complicated, as is the case for most annuities. Growth is tax deferred (as apposed to a CD where you pay as you go). Taxes will be owed if you cash out at the end of the term. This may be to your advantage, especially if you are building your bond ladder at a time when you don’t want income! Say you still have some income from work but you want a bond ladder, or you are trying to keep your income low for ACA Premium Tax Credits. You can pick bonds or CDs and pay ordinary income tax as you go, or defer paying until you cash in the MYGA. You will still pay ordinary income taxes, but you can pay when you decide the time is right with a MYGA.
If the time is not right to pay the taxes, you can do a 1035 exchange into another annuity or life insurance product. With MYGA, ordinary income taxes will be paid, but you have some flexibility to chose when you pay them!
In addition, it is also important to note that there is a 10% penalty if you are younger than 59 and a half when you take the growth. Thus, it is important to plan to withdrawal from a MYGA at the right time.
Finally, CDs are insured by the FDIC where as MYGAs are guaranteed by the issuing insurance company.
Example of a MYGA in a Bond Ladder
Let’s see what a MYGA is paying compared to CDs and Treasury Bonds.
Above, you can see MYGAs, CDs (average), CDs (Max) and Treasury Bonds in comparison. Note that a MYGA pays 2.25% up to 3.55% depending on how long you hold it for. CDs are shown for 3 and 5 year duration, and I have included the average rate and the best rate available (on Bank Rate dot Com). Treasury rates are shown for 3, 5, 7, and 10 year intervals.
So, let’s look at a sample of today’s rates and think about a ladder. If you are committed to have a bond ladder, should you consider adding a MYGA as a rung?
Above, you can see current rates for MYGAs, as well as current CD and Treasury rates. Of course, there are special deals for CDs, but you are more likely to get closer to the average than the max.
For 7 or 10 years, you might consider a treasury. TIPs might be an option if you are worried about inflation in the mid term. For years 5-7, MYGAs might be a consideration. Since you want a little more flexibility early on, maybe consider CD’s for years 3-4.
Wow, given low interest rates, it is just hard to consider having a bond ladder right now! Low interest rates just make finding sources of income in retirement planning difficult.
Consider bond alternatives as well, but this is a tough time to construct a bond ladder!
Where do MYGAs fit on a Bond Ladder?
Income planning is difficult!
Equities are priced high, and cash equivalents including Treasuries and CDs don’t pay much due to low interest rates.
What’s an investor to do?
If you are going to build a bond ladder, make sure you look at treasuries, CD and MYGA rates. Using a MYGA in a few rungs will increase your diversification and likely increase return a bit. Of course, the trade off is more complexity as you are dealing with a contract from an Insurance Company. There is also the deferral of taxes and penalty for early withdrawal to consider.
There are on-line sites which let you price out a MYGA and see if it might fit in as a rung in your Bond Ladder. Given the ability to 1035 the growth back in if you don’t need the money, or to use it for permanent life insurance if you have an indication for it, a MYGA is a consideration for your cash that you may need in the intermediate time frame during these times of low interest rates.