If you have a MYGA (Multi-Year Guaranteed Annuity), you might worry about getting your money if you need it unexpectedly.
Let's clear that up: your money isn't locked away completely!
The good news is you generally can access your funds from your MYGA when you need to. However, it's important to remember that MYGAs are designed to work best when you leave the money in for the full guarantee period (like 3, 5, or 7 years).
So, while you can get your money out, taking it out before that guarantee period ends usually means you'll face some fees or adjustments. Understanding the rules helps you avoid surprises!
This guide will show you the main ways you can get money from your MYGA.
For instance, we'll look at what happens if you need to take all your money out early (which usually involves fees). We'll also cover how you can often take out just a little bit each year without fees.
Plus, we'll explain special situations where you might be able to withdraw money penalty-free if a major life event happens, like needing nursing home care.
Of course, we'll also cover your choices when the guarantee period is over, and how taxes fit in.
To understand the withdrawal options and rules, it helps to know a bit about how the insurance company providing the annuity works.
Insurance companies take in money (premiums) from many people for products like MYGAs. They pool this money and invest it, usually in long-term, relatively safe investments like bonds.
They need to earn enough from these investments to cover the interest rates they promised you, pay their business costs, and stay financially healthy.
Their whole plan relies on holding these investments for the long haul, matching the guarantees they've made. If many people decide to take their money out early, the company might be forced to sell those long-term investments sooner than expected, potentially at a bad time or even at a loss.
This mismatch is a risk for the company. That's the main reason annuities have withdrawal rules.
Things like surrender charges and MVAs are designed to discourage early withdrawals that disrupt the company's investment strategy. These rules also help the company cover the costs of setting up your annuity and compensate them if they face losses from selling investments prematurely.
Ultimately, these rules help ensure the insurance company can keep its promises to all its policyholders, including those who stay for the full term.
So, you're thinking about taking money out of your MYGA before the guarantee period ends?
Taking money out early usually comes with costs. The main cost is often a "surrender charge."
This is a fee the insurance company charges if you take out too much money too soon. It's usually a percentage of the money you withdraw, and this percentage typically goes down each year.
For example, the charge might be 7% in the first year, 6% in the second, and so on.
Let's say you took out $10,000 in the first year when the charge is 7%; the surrender charge fee would be $700 ($10,000 x 0.07).
Companies use these fees to cover their costs and to encourage you to keep your money in for the whole term.
Sometimes, there's another thing called a Market Value Adjustment, or MVA.
Not all MYGAs have this, so check your contract. If yours does, it means the amount you get could be adjusted up or down based on how interest rates have changed since you bought the MYGA.
If interest rates go UP after you buy your MYGA, the older bonds the insurance company bought with your money aren't worth as much anymore (because new bonds pay better interest).
If you decide to take your money out early, the insurance company might have to sell those older bonds at a loss to pay you back.
The MVA is basically a way for the insurance company to adjust the money you get back to reflect that loss. It helps protect the company from losing too much money just because interest rates changed after you bought your MYGA.
If interest rates go DOWN, the opposite can happen. The bonds the company holds might be worth more. In this case, the MVA could potentially give you a slight boost on your withdrawal, although this is less common when early withdrawal penalties apply anyway.
For instance, imagine you withdraw $10,000 and interest rates have risen sharply. The MVA might cause a negative adjustment, perhaps reducing your withdrawal value by $200 (though this amount can vary a lot depending on the contract and how much rates changed). So, your $10,000 withdrawal might become $9,800 before surrender charges.
This MVA charge helps protect the insurance company from shifts in interest rates. The important thing to remember is that if you take money out early, you could face both surrender charges and an MVA like in these examples (if your contract has one).
Okay, so we talked about the costs of taking money out early. But is there any way to get some money out without those fees? Yes, often there is!
Most MYGAs let you take out a certain amount each year free of surrender charges and MVAs. This is often called the "free withdrawal provision."
How much can you take? It varies, but a common amount is 10% of your account value from the previous year.
You absolutely need to check your specific contract to know the limit. Just remember, even if the insurance company doesn't charge a fee, you'll still owe income tax on any earnings you withdraw.
Besides the annual free amount, many contracts also have "waivers."
These let you take out money without penalty if something major happens in your life, like being diagnosed with a terminal illness, needing to go into a nursing home long-term, or becoming disabled (the contract will define exactly what counts).
Some contracts might even have waivers for things like losing your job, but that's less common.
Also, if your MYGA is in an IRA, withdrawals needed for Required Minimum Distributions (RMDs) are usually penalty-free.
Again, these waivers are very specific to each contract, so reading the fine print is key to know exactly what situations are covered and what proof you might need.
Alright, let's talk about what happens when your MYGA's guarantee period finally ends.
Good news! You reach the finish line, and there are no early withdrawal penalties like surrender charges or MVAs to worry about.
The insurance company will let you know before the term is up, and you'll usually have a set window of time, often around 30 days, to decide what to do next.
It's really important to pay attention during this time and make a choice.
You generally have several options:
1) You can take all your money out in a lump sum. No company fees apply, but you will owe income tax on all the interest earnings.
2) You can renew the MYGA for another guarantee period with the same company. They'll offer you a new interest rate based on current rates, and a new surrender charge schedule will start.
3) You can turn the money into a stream of regular income payments, known as annuitization. You might choose payments for life or just for a certain number of years, and you pay taxes as you get the income.
4) You can move the money directly to another annuity or life insurance policy without paying taxes right away, using a process called a 1035 exchange.
What if you don't tell the company what you want to do?
Usually, the contract has a default option. It might automatically renew into a new term (maybe at a less attractive rate) or just sit in a very low-interest account. That's why you must be ready to make a decision when your MYGA matures!
Okay, let's talk about taxes – this part is really important!
When you take money out of a MYGA, any interest your money earned is generally taxed as regular income in the year you take it out.
It's not treated like capital gains (from selling stocks, for example), which can sometimes have lower tax rates.
Now, if you bought the MYGA with money you'd already paid taxes on (called "non-qualified" funds), there's a rule for figuring out what part of your withdrawal is taxable earnings.
It's often called LIFO, meaning the earnings come out first and are taxed first. Only after all the earnings are withdrawn do you get your original investment (your principal) back tax-free.
Also, be aware of a potential extra hit from the IRS: if you withdraw earnings before you turn age 59½, there's usually an additional 10% tax penalty on those earnings, on top of the regular income tax.
There are some exceptions, but they're limited. Things work a bit differently if your MYGA is inside a retirement account like an IRA (called "qualified" funds).
In that situation, withdrawals usually follow the normal IRA rules, meaning the entire amount you take out (both contributions and earnings) is typically taxed as regular income.
Before you actually take money out of your MYGA, especially if it's before the term ends, it pays to stop and think carefully.
First, ask yourself honestly: Is this withdrawal essential, like for an emergency, or is it more of a want? Given the potential costs, make sure it's truly necessary.
Next, find your actual MYGA contract document – don't just guess or rely on general info. Look up the exact surrender charge schedule, see if there's an MVA, and check which specific penalty waivers might apply to your situation. Every contract is unique.
Once you know the rules, try to estimate the total cost. Figure out the surrender charge fee, any MVA, plus the income taxes on the earnings (and that possible 10% IRS penalty if you're under 59½). Seeing the real cost helps you decide.
Also, consider how taking this money out now might affect your bigger financial goals.
Finally, think about alternatives. Do you have other savings you could use? Are there borrowing options that might be cheaper than paying the MYGA penalties and taxes?
Exploring other options first is always a smart move.
As we've seen, taking money out of your MYGA early often means paying fees like surrender charges and maybe an MVA.
While you might be able to take some money out penalty-free each year or for specific reasons, these options are usually limited.
The best time for penalty-free access is when your guarantee period ends (at maturity), giving you several choices.
Remember, taxes on earnings are always a factor when you withdraw.
The main point is this: MYGAs generally reward patience.
Understanding the withdrawal rules before you buy, and before you take money out, is key.
Try to match the MYGA's term length to how long you actually plan to keep the money invested.
Make sure any decisions fit your financial situation and are based on the details in your specific contract.
This article is for informational purposes only and does not constitute financial or tax advice. Consult with a qualified financial advisor and/or tax professional before making any decisions regarding your annuity.