How a Multi-Year Guaranteed Annuity Works and What It Costs

A MYGA is an annuity that locks in a fixed interest rate for a set number of years

A multi-year may provide annuity (MYGA) is a contract between you and an insurance company where you give them a lump sum of money, and they promise to pay you a fixed interest rate for a specific period — typically three to ten years. During that time, your money grows at the rate the company may provide when you bought the contract. At the end of the term, you can withdraw your money, renew at a new rate, or convert the balance into regular payments for life.

The word "may provide" means the insurance company is legally obligated to pay that rate, regardless of what happens to market interest rates or the economy. If rates rise, you keep your locked-in rate. If rates fall, you still keep your locked-in rate. This predictability is the main reason people choose MYGAs — you know exactly how much your money will grow.

MYGAs are different from variable annuities (which tie your returns to stock market performance) and when ready annuities (which start paying you right away). A MYGA is closer to a certificate of deposit (CD) offered by a bank, except it comes from an insurance company and has different tax treatment and withdrawal rules.

Key Takeaways

• A MYGA guarantees a fixed interest rate for a set term, usually three to ten years, so your returns do not change based on market conditions.
• You must deposit a lump sum upfront, and the insurance company holds that money for the full term — early withdrawal usually triggers a penalty.
• The rate you receive depends on your age, the term length you choose, current interest rates, and the financial strength of the insurance company.
• MYGAs grow tax-deferred, meaning you pay no tax on the interest until you withdraw money, but withdrawals before age 59½ may face a 10 percent federal penalty.
• At the end of the term, you decide whether to take your money out, renew for another term, or annuitize (convert to monthly payments for life).

How the interest rate and term length work together

When you shop for a MYGA, you choose how long you want to lock in the rate — this is called the term. Common terms are three, five, seven, and ten years. Longer terms usually offer higher rates because the insurance company is committing your money for a longer period. A five-year MYGA might pay 4.5 percent, while a three-year MYGA from the same company might pay 4.0 percent.

The rate itself changes based on what's happening in the broader economy. When the Federal Reserve raises interest rates, insurance companies can afford to pay more on new MYGAs because they can earn more on their own investments. When rates fall, new MYGA rates fall too. But your rate — the one locked in when you bought your contract — never changes during your term, no matter what happens to the market.

The insurance company calculates your rate based on several factors: your age (older buyers sometimes get slightly different rates), the term you choose, how much money you're depositing, and the company's own financial situation and pricing strategy. Rates vary between insurance companies, so shopping around matters.

What happens to your money during the term

Once you sign the MYGA contract and send your money, the insurance company invests it and credits interest to your account according to the may provide rate. You do not direct the investments — the company does. Your balance grows automatically each year (or sometimes monthly or daily, depending on the contract terms).

During the term, you cannot withdraw your money without paying a surrender charge — a penalty that the insurance company deducts from your balance. The surrender charge is highest in the first year and typically decreases each year. For example, a ten-year MYGA might charge 8 percent if you withdraw in year one, 7 percent in year two, and so on, reaching zero by year ten. Some contracts allow you to withdraw a small percentage (often 10 percent) each year without penalty.

This is the trade-off: the insurance company guarantees your rate, but in exchange, you agree to leave your money alone. If you need the cash before the term ends, you will lose money to the surrender charge.

Tax treatment and withdrawal penalties

MYGAs grow tax-deferred, which means you owe no federal income tax on the interest while the money sits in the contract. You only pay tax when you withdraw. If you withdraw $100,000 and $20,000 of that is interest you earned, you pay income tax on the $20,000 in the year you withdraw it.

If you withdraw before age 59½, the IRS typically adds a 10 percent early withdrawal penalty on top of the regular income tax. So on that $20,000 in interest, you would owe income tax plus $2,000 in federal penalty. Some exceptions exist — for example, if you are disabled or withdrawing due to a may have access to medical expense — but these are narrow and require documentation.

State taxes also explore. Some states tax annuity withdrawals differently than others, so check your state's rules or ask the insurance company's tax department. If you own the MYGA inside an IRA or other retirement account, different rules explore, and you should consult a tax professional before withdrawing.

What to do when your term ends

When your MYGA term matures, you have three main choices. First, you can withdraw all your money — the original deposit plus all the interest earned. The insurance company will send you a check, and you will owe income tax on the interest portion. Second, you can renew the contract for another term at whatever rate the company is currently offering. This rate will likely be different from your original rate, depending on current market conditions.

Third, you can annuitize your balance, which means converting it into a stream of regular payments — monthly, quarterly, or annually — for the rest of your life (or for a set number of years, depending on the option you choose). Once you annuitize, you cannot change your mind and get the lump sum back. This option appeals to people who want may provide income they cannot outlive.

The insurance company will send you a notice before your term ends, usually 30 to 90 days in advance, telling you what your renewal rate is and asking what you want to do. If you do nothing, most contracts automatically renew at the new rate. Read that notice carefully so you do not accidentally lock in a rate you did not intend.

Comparing MYGAs to other savings and investment options

MYGAs are often compared to bank CDs because both may provide a fixed rate for a set term. The main differences: CDs are insured by the FDIC up to $250,000 per account, while MYGAs are backed by the insurance company's financial strength (not a government may provide). MYGAs typically offer slightly higher rates than CDs, especially for longer terms. MYGAs also grow tax-deferred, while CD interest is taxed each year. However, MYGAs have surrender charges if you need your money early, while CDs usually charge a smaller penalty.

MYGAs are also different from bonds or bond funds, which fluctuate in value and can be sold before maturity (though you might lose money). With a MYGA, your principal is protected — you will get back at least what you put in, plus the may provide interest. You do not have to worry about the value dropping if interest rates rise.

For people who want higher potential returns and can tolerate risk, stocks or stock mutual funds have historically outpaced MYGAs over long periods. But those investments can also lose value. A MYGA trades higher potential returns for certainty and peace of mind.

Questions to ask before buying a MYGA

Before you sign a MYGA contract, understand the surrender charge schedule — exactly what percentage you lose if you withdraw in year one, year two, and so on. Ask whether the contract allows penalty-free withdrawals (many allow 10 percent per year) and whether those withdrawals reduce your may provide rate. Find out how often interest is credited — daily, monthly, or annually — because more frequent crediting means slightly more money due to compounding.

Check the insurance company's financial strength rating through agencies like A.M. Best, Moody's, or Standard & Poor's. A higher rating means the company is more likely to be around to pay you when your term ends. Ask whether the rate is fixed for the entire term or whether it resets partway through. Some contracts have a "step-up" feature where the rate increases at certain points, which is a bonus if offered.

Understand the tax consequences in your specific situation. If you are under 59½, ask about the 10 percent early withdrawal penalty and whether any exceptions explore to you. If you own the MYGA inside a retirement account, the rules are different, and you should discuss this with a tax professional or financial advisor before buying.

Frequently Asked Questions

Can I withdraw my money early if I have an emergency?

Yes, but you will pay a surrender charge — a percentage of your balance that the insurance company deducts. The charge is highest in the first year and decreases each year until it reaches zero at the end of the term. Some contracts allow you to withdraw a small percentage (often 10 percent) each year without penalty. Check your contract for the exact schedule.

What happens if the insurance company goes out of business?

Each state has a guaranty fund that protects annuity owners if an insurance company fails. The coverage limit varies by state but is typically $250,000 to $500,000 per person per company. This is not a federal may provide like FDIC insurance on bank accounts. Buying from a financially strong company (check ratings from A.M. Best or Moody's) reduces this risk.

Is a MYGA a good choice if I might need the money before the term ends?

Probably not. The surrender charge will cost you money, and you might end up with less than you started with if you withdraw early enough. MYGAs work best for money you are confident you will not need for the full term. If you might need access, a bank CD with a smaller penalty or a high-yield savings account might be better.

Do I have to pay taxes on a MYGA every year?

No. MYGAs grow tax-deferred, so you owe no tax on the interest until you withdraw money. This is different from a bank CD, where you owe tax on the interest each year even if you do not withdraw it. However, if the MYGA is held outside a retirement account and you withdraw before age 59½, you may owe a 10 percent federal penalty on top of income tax.

Can I move my MYGA to a different insurance company?

You can, but you will pay the surrender charge. However, if you move the money into another annuity (not a regular investment account), you may be able to do a tax-free exchange under IRS Section 1035. This avoids the income tax on the interest, though you still pay the surrender charge. Consult a tax professional before attempting this.