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With a multi-year guaranteed annuity (MYGA), you sign a contract with an insurance company. In exchange for your premium payments, the insurance company provides a guaranteed fixed interest rate on your contribution for a specified period of time. The term can be three years, five years, 10 years or any number of years in between.
A MYGA works by tying up a lump sum of money to allow it to accumulate interest. If you need to withdraw funds from an annuity before the accumulation period is over, you may have to pay fees called surrender charges.
At the end of the accumulation period, you can receive the premium and interest earned, or you may be able to renew the contract. If you choose to renew the contract, the interest rate may differ from the one you had originally agreed to.
Another option is to transfer the funds into a different type of annuity. You can do so without facing a tax penalty by using a 1035 exchange.
To better understand how an individual nearing retirement might benefit from a MYGA, let’s look at a case study example.
MYGA purchasers typically seek a risk-free avenue to bolster their savings in anticipation of retirement. These individuals, as noted by Annuity.org expert contributor Stephen Kates, CFP®, often fall into two categories: those nearing retirement and those bridging the gap into retirement.
According to Kates, the typical MYGA customer is someone who prefers to avoid market risks as they approach retirement but still aims to augment their savings for post-retirement income.
Moreover, MYGAs offer the advantage of precise income planning, as their interest rates remain constant throughout the annuity’s term.
Current MYGA rates change daily and vary slightly from carrier to carrier. MYGA rates are usually higher than CD rates, and they are tax deferred which further improves their return. A contract with more limiting withdrawal provisions may have higher rates.
Many annuity providers offer penalty-free withdrawal provisions that allow you to access some of the money from an annuity before the surrender period — the time frame during which surrender charges for early withdrawals applies — ends without having to pay fees. Some contracts, for example, allow you to withdraw up to 10% starting in the first year.
Your contract may also allow you to take money out for emergencies. For example, if you need money to pay a hospital bill, you may be able to take it out of your MYGA. This may be better than getting a 401(k) loan or withdrawing funds from an IRA.
But before pulling money out of your annuity early, remember that one of the major benefits of a MYGAs is that they grow tax-deferred. Once you start withdrawing funds, you’ll be subject to taxes.
A MYGA offers tax deferral of interest that is compounded on an annual basis. This can create additional wealth exponentially because the tax occurs only when you take the money out. It’s like investing in an IRA or 401(k) — but without the contribution limits.
This tax benefit is not unique to MYGAs. It exists with traditional fixed annuities as well.
The tax rules change slightly depending on the type of funds you use to purchase the annuity:
This tax benefit is not unique to MYGAs. It exists with traditional fixed annuities as well.
Are you looking for a safe place to park your money for a couple of years with better returns than a traditional bank CD? A 2-year annuity might be exactly what you need. I’ve been researching these financial products for my clients and I’m excited to share everything I’ve learned about these short-term investment vehicles.
Understanding the Basics of a 2-Year Annuity
A 2-year annuity is a contract between you and an insurance company where you make a lump-sum payment, and in return, the insurer guarantees you a specific interest rate for a 2-year period. It’s essentially a time-bound financial product that offers tax advantages and principal protection while providing competitive interest rates.
These annuities are part of a broader category called Multi-Year Guaranteed Annuities (MYGAs), which function similarly to CDs but typically offer higher interest rates and tax-deferred growth.
Types of 2-Year Annuities
There are several types of 2-year annuities to consider each with its own features and benefits
2-Year Fixed Annuity (MYGA)
This is the most straightforward type where:
- Your interest rate is locked in for the entire 2-year term
- Your principal is 100% protected from market downturns
- Growth is tax-deferred until withdrawal
- Current rates are competitive, with some offering around 5% (as of April 2025)
2-Year Fixed Index Annuity (FIA)
This type offers:
- Potential for higher returns based on market index performance
- Principal protection even if the market falls
- Interest credits based on indexes like the S&P 500, DJIA, or NASDAQ
- Limitations through caps, spreads, or participation rates
2-Year Variable Annuity
Though less common for short terms
- Invested in mutual-fund-like subaccounts
- No guarantee of principal or growth
- Higher potential returns with higher risk
- Not typically recommended for conservative investors
2-Year Deferred Income Annuity (DIA)
For those focused on future income:
- You deposit money today
- After 2 years, guaranteed income payments begin
- Payments continue for life or a set period
- Limited liquidity during the deferral period
2-Year Medicaid-Compliant Annuity
A specialized option:
- Pays out principal and interest over 2 years in equal monthly payments
- Helps qualify for Medicaid while preserving some wealth
- Not designed for growth or general retirement planning
How a 2-Year Annuity Works
The process is pretty straightforward:
- Purchase: You buy the contract with a lump sum payment from various sources (nonqualified account, IRA, Roth IRA, rollover, or 1035 exchange).
- Accumulation: Your money grows at the guaranteed rate or based on index performance for 2 years.
- Limited Access: Most contracts allow free withdrawals up to 10% annually without penalties.
- End of Term Options: When the 2 years end, you can renew, annuitize, roll over to a new annuity, or cash out.
Current 2-Year Annuity Rates
As of April 2025, some of the top 2-year fixed annuity rates from reputable providers include:
| Provider | Rate | Guarantee Period | Surrender Period |
|---|---|---|---|
| CL Sundance | 5.10% | 2 Years | 2 Years |
| Asset Guard | 4.95% | 2 Years | 2 Years |
| Future Flex 5 | 5.00% | 2 Years | 5 Years |
| Future Flex 8 | 4.50% | 2 Years | 8 Years |
| Guardian Eagle | 4.25% | 2 Years | 5 Years |
Note: Rates are subject to change. It’s always best to check current rates before making a decision.
Pros and Cons of 2-Year Annuities
Let’s weigh the advantages and disadvantages:
Pros
- Safe and predictable returns: Know exactly what you’ll earn
- Principal protection: Your initial investment is secure
- Tax-deferred growth: Pay taxes only when you withdraw
- Higher yields than most CDs: Generally offer better rates than bank products
- Short commitment: No need to lock money up for many years
Cons
- May underperform longer-term options: Shorter terms usually mean lower rates
- Limited liquidity: Penalties may apply for withdrawals beyond the free amount
- Needs reinvestment plan: You’ll need to decide what to do when the term ends
- Lower yield than equities: Won’t match potential stock market returns
- Surrender charges: Early withdrawals may incur penalties
Who Should Consider a 2-Year Annuity?
A 2-year annuity might be perfect for you if:
- You’re currently holding CDs but want better yields and tax advantages
- You’re a retiree looking for short-term principal protection before needing income
- You’re a pre-retiree waiting to decide on longer-term annuity strategies
- You’re planning for Medicaid eligibility and need spend-down solutions
- You have maturing bonds, CDs, or annuities and want to reallocate gradually
Who Should Avoid 2-Year Annuities?
This financial product probably isn’t right for you if:
- You’re focused on longer-term goals (3-10 year annuities typically offer better rates)
- You need immediate or lifetime income (income annuities or GLWBs would be better)
- You require full liquidity at all times (the 10% withdrawal limit might be too restrictive)
- You’re seeking aggressive growth (stock market investments might be more appropriate)
What Happens After the 2-Year Term Ends?
When your 2-year annuity matures, you have several options:
- Renew: Many contracts automatically renew unless you specify otherwise during a 30-day window.
- Transfer: Use a 1035 exchange or qualified transfer to move to another annuity with better terms.
- Withdraw: Take the cash out (note that gains will be taxable if they were tax-deferred).
- Roll into a lifetime income annuity: Convert to a product designed for long-term income, like a Fixed Index Annuity with a GLWB.
Death Benefit Considerations
If you’re concerned about what happens to your annuity if you pass away during the term:
- Most 2-year annuities pay the full account value (including interest) to your beneficiaries
- No surrender charges apply when death occurs during the term
- Annuities typically avoid probate if you’ve designated a beneficiary
Real-Life Example: How a 2-Year Annuity Works
Let’s look at an example of someone who might benefit from a 2-year fixed annuity:
Susan is 63 years old and just a few years from retirement. She has $100,000 that she wants to protect while earning a decent return. She doesn’t need the money immediately and anticipates being in a lower tax bracket after retirement.
She finds a 2-year MYGA offering a guaranteed rate of 5.25%. This gives her:
- Principal protection (her $100,000 is safe)
- A guaranteed return (approximately $10,762 over two years)
- Tax deferral (she won’t pay taxes on the interest until withdrawal)
- Time to plan her next financial move as she approaches retirement
After two years, Susan will have about $110,762 that she can then roll into a longer-term income solution as she enters retirement.
Funding Options for Your 2-Year Annuity
You can fund a 2-year annuity through various sources:
- Nonqualified assets (bank savings, CDs, brokerage accounts)
- IRA or Roth IRA funds (via direct contribution or rollover)
- 401(k), 403(b), or TSP rollovers
- 1035 exchanges from existing annuities or life insurance policies
2-Year Annuities vs. Other Financial Products
When comparing 2-year annuities to other short-term financial products, consider these differences:
2-Year Annuity vs. 2-Year CD
- Tax treatment: Annuities offer tax-deferred growth; CD interest is taxable annually
- Liquidity: Annuities typically allow 10% annual withdrawals; CDs are generally illiquid
- Rates: Annuities usually offer higher rates than CDs
- Protection: Both protect principal, but annuities may also protect against creditors in some states
2-Year Annuity vs. Bond Funds
- Risk level: Annuities guarantee principal; bond funds can lose value
- Interest rate sensitivity: Annuity rates are fixed; bond funds are affected by market changes
- Fees: Annuities have surrender charges; bond funds have expense ratios
- Liquidity: Annuities have limited liquidity; bond funds can be sold any time
Final Thoughts: Is a 2-Year Annuity Right for You?
A 2-year annuity can be an excellent short-term safety net for your money, especially if you’re looking for:
- Better rates than bank products
- Principal protection
- Tax advantages
- A bridge strategy between other financial plans
However, I always tell my clients that annuities should be part of a broader financial strategy. They’re tools, not complete solutions, and work best when integrated with other retirement and investment vehicles.
If you’re considering a 2-year annuity, I recommend consulting with a financial advisor who can help you compare current rates and determine if this product aligns with your overall financial goals. Remember that rates change frequently, and the financial landscape is always evolving!
Have you ever used a short-term annuity as part of your financial strategy? I’d love to hear about your experiences in the comments below!
Disclaimer: This information is for educational purposes only and should not be considered personalized financial advice. Before making retirement decisions, always consult with a qualified financial professional.
MYGAs vs. Traditional Fixed Annuities
MYGAs are a type of fixed annuity. The main difference between traditional fixed annuities and MYGAs is how long the contracts guarantee the fixed interest rate.
MYGAs guarantee the interest rate for the entire duration of the contract, which could be, for example, 10 years. Traditional fixed annuities may guarantee the interest rate only for a portion of the term of the contract. So, you may buy an annuity with a seven-year term but the rate may be guaranteed only for the first three years.
When people speak of MYGAs, they usually liken them to CDs. Both offer guaranteed rates of return and guaranties on the principal.
A MYGA works very similarly to a CD: You deposit a lump sum of cash and receive a fixed interest rate for a specific period of time. Compared to investments like stocks, CDs and MYGAs are safer, but the rate of return is lower.
They do have their differences, however.
6 Differences Between MYGAs and CDs
- A CD is issued by a bank or a broker; a MYGA is a contract with an insurance company.
- A CD is insured by the FDIC; a MYGA is not insured by the federal government, but insurance companies must belong to their state’s guaranty association.
- A CD typically imposes a penalty for withdrawing money prior to maturity; a MYGA may allow you to take out some of the money annually without incurring fees.
- A CD may have a lower interest rate than a MYGA; a MYGA may have more fees than a CD.
- A CD’s interest rate is taxed each year; a MYGA offers tax-deferred growth.
- CDs may be made available to creditors and liens; MYGAs are protected against them.
You could use a MYGA as a substitute for a CD, or you could incorporate both into your financial plan.
Is a MYGA Right for You?
As with any financial product, you need to see what your financial goals are prior to purchasing a MYGA.
You’re Close to Retirement and Want To Avoid Risk
Given the conservative nature of MYGAs, they might be more appropriate for consumers closer to retirement or those who prefer not to be subjected to market volatility.
“I turn 62 this year and I really want some sort of a fixed rate as opposed to worrying about what the stock market’s going to do in the next 10 years,” Annuity.org customer Tracy Neill said.
If you are looking for a solution to replace your income upon retirement, other types of annuities may make more sense for your financial goals. Moreover, other types of annuities have the potential for higher reward, but the risk is higher, too.
You’re Looking for Long-Term Growth
While potentially suitable for a risk-averse investor, a MYGA may not be suitable for a younger investor interested in growth.
MYGAs offer steady, guaranteed growth, but their fixed interest rates typically don’t generate as high of returns as other investment products. This may not appeal to younger investors looking for long-term growth.
You’re Worried About Inflation
For those who are looking to outpace inflation, a MYGA might not be the best financial strategy to meet that objective. Because MYGA interest rates are fixed for the contract term, they don’t adjust to cost-of-living increases, meaning their value may diminish over time.
How To Buy a MYGA
Because interest rates are set by insurance companies that sell annuities, it’s important to do your research before signing a contract.
- The first step is to consult a financial advisor and determine how much you would like to invest in an annuity.
- Then, it’s time for comparison shopping: Look at various highly rated insurance companies to see the MYGA rates they offer.
What Is An Annuity And How Does It Work?
FAQ
What is a 2 year fixed annuity?
The following table shows 2-year fixed annuity rates from some of the nation’s top providers. The term of the annuity refers to how many years the initial rate is guaranteed. There is no minimum amount required to purchase an annuity, though the national average is $150,000.
What is a 2-year multi-year guaranteed annuity (myga)?
She finds a 2-year multi-year guaranteed annuity (MYGA) offering a guaranteed rate of 5.25%. This product offers everything she is looking for: a low-risk way to grow her money in the last couple of years leading up to retirement while also giving her tax advantages through its deferral feature.
Should I buy a 2 year fixed annuity?
If you are interested in a 2-year fixed annuity, compare your options with other common fixed-term products. One of the primary benefits of a fixed annuity is the lack of market risk involved in maintaining the protection of your principal.
What are the different types of annuities?
Annuities can be structured generally as fixed, variable, or indexed: Fixed annuities provide a guaranteed minimum rate of interest and fixed periodic payments to the annuitant. Variable annuities allow the owner to receive larger future payments if investments held in the annuity fund do well or smaller payments if its investments do poorly.
When do fixed annuities start paying you income?
Immediate annuities start paying you income within 12 months of your purchase. Like any financial product, the devil is in the details for fixed annuities. Understanding the nuances of payout options, interest rates, and contract terms is important for making informed decisions about your retirement security. How Do Fixed Annuities Work?
What is a fixed annuity?
The term of the annuity refers to how many years the initial rate is guaranteed. There is no minimum amount required to purchase an annuity, though the national average is $150,000. Fixed annuities guarantee an interest rate for a set number of years, known as the guarantee period. Once the guarantee period lapses, the annuity’s rate may change.
How much do you need in an annuity to get $1000 a month?
We’ll also assume you’re going to live approximately 18 more years to the average male life expectancy of 83 years. In order to withdraw $1,000 each month you would need roughly $192,000. If you exceeed your life expectancy and make it to the ripe old age of 90 you would need approximately $240,000.
What is the downside of an annuity?
Can you buy a 2 year annuity?
A 2-year annuity is a short-term financial product designed to offer a guaranteed return on your investment over two years. You pay a lump sum to an insurance company, and in return, you receive a fixed interest rate for the duration of the annuity term.
Do you get your money back at the end of an annuity?
You do not automatically get your principal money back from an annuity at the end of the contract, as it depends on the specific annuity type and contract terms, such as a period certain or cash refund feature. While many people assume annuities are designed to provide lifetime income and not a refund of their principal, annuities can be structured to ensure the return of your principal or a death benefit to your beneficiaries. However, annuities without these features, such as a straight lifetime payout, will not return the principal if the annuitant dies before the value is depleted.
