MEDFORD, OR 01/07/2024 - Looking for a safe, guaranteed way to lock in a high interest rate? Consider a multi-year guarantee annuity (MYGA), says annuity expert and author Ken Nuss.
As of early January, you can find a MYGA that pays 6.00% for either a three- or 10-year term. A five-year annuity guaranteeing 5.95% annually is also available. This table of fixed annuity rates offers a quick way to find good rates.
MYGA is another term for a fixed-rate annuity. “They pay higher rates than they have in more than a decade, and longer terms are especially appealing right now,” Nuss says.
A MYGA acts much like a bank certificate of deposit (CD), guaranteeing a set rate for a term. However, when it comes to a fixed annuity vs. CD, the former is the better option for one reason. Unlike a CD, all interest earned in a nonqualified annuity is tax-deferred until withdrawn.
Annuities are particularly appropriate for people in their mid-50s or older because there are tax penalties for taking interest out before age 59½.
Ladder MYGAs to lock in long-term rates
If you have enough money to spread it among two or more annuities, consider “laddering” guarantee terms. An annuity ladder strategy allows you to spread your money among annuities of different terms, giving you both good current income and future flexibility.
“In the past, I’ve recommended laddering annuities from three to five years because you wouldn’t earn much more with a longer-term annuity. Today, I still recommend laddering, but instead use MYGAs with terms from five to 10 years,” Nuss says.
That’s because today’s opportunity to lock in high rates won’t last. MYGA rates fluctuate, so if you purchase a two- or three-year product, rates are likely to be lower when the term is up.
Many people are understandably wary of tying up their money that long. Of course if, for whatever reason, you don’t feel comfortable committing to doing that, a three-year MYGA is still very attractive at today’s rates.
Most annuities offer some liquidity. Provisions vary, but many let you take out up to 10% of the value annually without penalty. If you take out more than the allowed amount, the insurer will levy a surrender charge. If you are concerned about needing some of your money before the term is up, choose an annuity with liberal withdrawal rules.
MYGAs also work well as IRAs and Roth IRAs
MYGAs also work well for IRAs and Roth IRAs. You must begin taking required minimum distributions (RMDs) from a standard IRA at age 72 (or 73 if you’ve reached age 72 after Dec. 31, 2022). Look for an IRA MYGA that lets you take out your RMDs without penalty. Many do.
Roth IRAs don’t require RMDs and offer tax-free withdrawals. A MYGA paying, say, 6.00%, will steadily grow in value if you let it compound within a Roth IRA.
Longer terms let you lock in a high rate
It is pretty certain interest rates will decline eventually. But no one knows when it will happen, how quickly, or how much rates will decline.
History suggests that it’s a good time to consider purchasing longer-term annuities today—assuming that you’re willing and able to tie up some of your savings in exchange for an attractive guaranteed long-term interest rate.
“Whenever considering an annuity, get the company’s A.M. Best rating, which can help you judge its financial staying power,” Nuss says.
More About Ken Nuss
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He’s a nationally recognized annuity expert and prolific writer on retirement income. A free comparison service of interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
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