MYGA vs CD

[capjak]

Is a MYGA 3.00% (A- rated) 6 year vs 2.5% CD (FDIC insured) worth it (risk/reward) for fixed income allocation

and a 3.15% MYGA (B++ rated) 5 year vs 2.35% CD?

 

[brewer12345]

Would not touch either of those annuities at such tiny spreads.

 

[jazz4cash]

I would need a bit more return but generally 5 yr MYGA would be comfortable for me with up to two yrs expenses (~8 pct).

 

[capjak]

Would not touch either of those annuities at such tiny spreads.

Thanks Brewer that was initial thought. Than I investigated further and they do have some advantages.

Although these annuities work like CDs (i.e. you get your $$ back at the end of the fixed time period plus compounded interest) they have the advantage of slightly higher rate and penalty free (in many cases) withdrawal after the 1st year up to 10% of value and taxes are not paid annually as interest until the end of the period or I guess potentially upon death if keep rolling them over.

I do not like the rating of B++ (A- is better but still not A+ even though it is a short period) for something I consider "safe" money. Otherwise I think it would be a good option.

 

[jazz4cash]

Hope to see more input on this. I actually wanted to start similar thread but feared strong negative reaction whenever the word annuity appears on this forum. I had decided to use a 5 yr MYGA rated B+ or better at 3.1 or better to fill some open rungs on my CD ladder. This would be a small % to really explore this alternative and better understand things like MVA on early withdrawals although it is not significant for me.
I ended up having a long drawn out process to get NFCU to release my IRA funds so I am less inclined to establish any additional bank or investment company relationships. Beyond a subsistence level for my CD ladder I'm actually leaning back towards high quality bonds and dividend growth stocks.

One question I had was on the 10% plus interest penalty free withdrawal. Is that 10% every year or just once during the term.

 

[Koolau]

I have a couple of SPDAs which are somewhat similar. Had them for years. Their guaranteed rate was fixed at 4.5% which is kind of nice now - not so much back in the day. I don't think I would be too concerned about the company staying in business or paying off. Just not sure about the spread vs a CD. YMMV

 

[capjak]

One question I had was on the 10% plus interest penalty free withdrawal. Is that 10% every year or just once during the term.

They may all be a little different but based on the Oxford, one I received information on, you can take 10% of the value after the first year penalty free (assuming non qualified funds).

Other than the insurance company risk of going out of business and perhaps some paperwork, I do not see the downside to doing this.

 

[pb4uski]

If after a year or two you want out.... how much of the $100 you put in will you get back? With a CD, early withdrawal penalties are typically 6-12 months of interest.... I'm guessing that it is more with the MYGA.

 

[brewer12345]

They may all be a little different but based on the Oxford, one I received information on, you can take 10% of the value after the first year penalty free (assuming non qualified funds).

Other than the insurance company risk of going out of business and perhaps some paperwork, I do not see the downside to doing this.

The downside is credit risk. A b plus company is pretty shaky.

 

[pb4uski]

+1 especially since you are comparing it to an FDIC insured instrument... which is only a half a notch or so below "full faith and credit".... essentially AAA.

 

[capjak]

If after a year or two you want out.... how much of the $100 you put in will you get back? With a CD, early withdrawal penalties are typically 6-12 months of interest.... I'm guessing that it is more with the MYGA.

Guarantee
Period Surrender Charge
3-Year 10% 9% 8%
4-Year 10% 9% 8% 7%
5-Year 10% 9% 8% 7% 6%
6-Year 10% 9% 8% 7% 6% 5%
7-Year 10% 9% 8% 7% 6% 5% 4%
8-Year 10% 9% 8% 7% 6% 5% 4% 3%
9-Year 10% 9% 8% 7% 6% 5% 4% 3% 2%
10-Year 10% 9% 8% 7% 6% 5% 4% 3% 2% 1%

 

[pb4uski]

Ouch. So you can't get out with your original principal intact until after the end of the 3rd year! No way!

 

[capjak]

Ouch. So you can't get out with your original principal intact until after the end of the 3rd year! No way!

Correct.

For a three year MYGA with a $100,000 invested, you can take out 10,000 in year 2 penalty free but if you take out more than that you are going to forfeit 9%. In addition, you have a 30 day window at the end of year 3 to either take the lump sum (and pay taxes on the interest) or move to another annuity or it will automatically move into another 3 year MYGA.

 

[jazz4cash]

There is also a market value adjustment (MVA) on top of the surrender charge on some of these instruments. Basically you are penalized more if rates have increased as I understand this. I don't recall seeing anything about the MVA penalty when I first started looking into these about 18 months ago.