Fixed-Rate Deferred Annuities in Texas: Safety, Returns, and the Fine Print
A multi-year guaranteed annuity (MYGA) is a contract where a life insurer pays a fixed rate for a set term — currently 5.10%–5.85% on 5-year terms from A-rated carriers in mid-2026. Interest grows tax-deferred at the federal level, principal is protected by the Texas Life and Health Insurance Guaranty Association up to $250,000 per owner per insurer, and surrender charges apply if you cash out before the guarantee period ends. For a Texas saver in the 22%+ federal bracket, a MYGA usually wins on after-tax yield versus an equivalent-term CD or treasury.
What a MYGA actually is
A MYGA is the annuity-world equivalent of a CD: you deposit a lump sum, the carrier agrees to credit a guaranteed fixed rate for a defined term (typically 3, 5, 7, or 10 years), and at the end of the term you can withdraw the funds, roll into a new MYGA via a tax-free 1035 exchange, or annuitize for income.
Unlike a CD, the interest grows tax-deferred. You owe no federal income tax on the credited interest until you withdraw it — which means a Texan in the 24% federal bracket effectively reinvests the deferred tax dollars at the contract rate every year. Over a 5-year term, that deferral is worth meaningful basis points.
Texas has no state income tax, so the comparison versus treasuries (which are state-tax-free) is a wash on that dimension. The relevant comparison is always federal after-tax yield.
MYGA vs CD vs Treasury in 2026
A 5-year MYGA at 5.50% credited tax-deferred beats a 5-year CD at 4.40% taxed annually for any Texan in the 22%+ federal bracket. The deferral and the rate premium compound together.
Treasuries are federally taxable annually and currently yield approximately 4.20% on the 5-year. For non-retirement money held outside of an IRA, a MYGA typically wins on after-tax yield by 80–140 basis points per year.
Bond funds have no maturity guarantee. A 5-year MYGA at 5.50% returns 5.50%, period. A bond fund at a 5.10% yield-to-maturity can lose principal if rates rise — as Texas savers learned in 2022.
What 'safe' actually means
MYGAs are backed by the issuing carrier, not the FDIC. There is no federal insurance backstop. The protection comes from two layers: the carrier's own statutory reserves (regulated by the Texas Department of Insurance for Texas-licensed carriers) and the Texas Life and Health Insurance Guaranty Association.
Stick to AM Best A- or better. Carriers rated below A- have a meaningfully higher historical impairment rate. Avoid offshore-domiciled issuers and any 'private placement' annuity not licensed in Texas.
The Texas Guaranty Association covers $250,000 of present value per owner per insurer. If you are placing more than $250,000, split across two unrelated carriers so each contract is independently within the guaranty cap.
Fees, surrender charges, and the fine print
MYGAs typically have no explicit annual fee — the carrier earns its margin on the spread between what they pay you and what they earn on their bond portfolio.
Surrender charges apply if you cash out before the guarantee period ends. A typical schedule starts at 8–9% in year 1 and declines by 1% per year. Most contracts allow 10% free withdrawal per year after year 1.
A Market Value Adjustment (MVA) may also apply on early withdrawal — it can work for or against you depending on the direction of interest rates since you bought.
At maturity, most contracts default-roll into a new term at the carrier's then-current rate. That default rate is often substantially below market. Always confirm the renewal procedure and put a calendar reminder 30 days before maturity to make an active decision.
Tax treatment Texans should know
Inside the contract: tax-deferred growth at the federal level. Texas has no state income tax, so no state offset.
On withdrawal: gains are taxed as ordinary income (not capital gains) — see IRS Publication 575. Withdrawals before age 59½ add a 10% federal penalty on the gain portion.
At death: the contract passes to a named beneficiary outside probate. Gains are taxable to the beneficiary as ordinary income — there is no step-up in basis on annuities, unlike taxable brokerage assets.
How to evaluate a MYGA in Texas
- Match the term to a real goal. 5 years for a known future purchase; 7–10 years for a retirement-bridge income gap; never longer than the time horizon of the money.
- Check the carrier. AM Best A- minimum, ideally A or A+. Verify the carrier is licensed in Texas through the Texas Department of Insurance website.
- Read the renewal clause. Some contracts roll to a low 'bailout' rate after the guarantee period. Know what rate you will be earning on day one of the renewal.
- Confirm the free-withdrawal. Most contracts allow 10% per year penalty-free after year 1. Confirm in writing.
- Stay under the guaranty cap. Keep each contract under $250,000 of present value. Split larger sums across two carriers.
- Set a maturity calendar reminder. 30 days before the guarantee period ends, decide: withdraw, 1035 exchange to a new contract, or annuitize.
FAQ
Federally, yes — as ordinary income on withdrawal. Texas has no state income tax, so there is no Texas tax.
Yes — into another annuity tax-free at the end of the term under IRC §1035, or earlier subject to surrender charges. This is the standard way to keep deferral running into a new guarantee period.
The Texas Life and Health Insurance Guaranty Association covers up to $250,000 of present value per owner per insurer. Above that cap, you are an unsecured creditor of the carrier — historically these cases resolve at 70–90 cents on the dollar.
Mechanically yes — most carriers issue MYGAs as IRAs. But the tax-deferral benefit is redundant inside an IRA, so the only reason to do it is the rate guarantee versus alternatives like CDs or treasuries inside the same IRA.
Sources & further reading
Primary statutory, regulatory, and tax references for the claims in this article. Specific premium quotes and carrier underwriting thresholds are illustrative — confirm with a current quote and the carrier's published guide.
- Buyer's Guide to Fixed Deferred Annuities — NAIC
- Texas Life & Health Insurance Guaranty Association — Coverage Limits — Texas Life & Health Insurance Guaranty Association
- Annuities — Consumer Information — Texas Department of Insurance
- 26 U.S. Code §1035 (Tax-Free Exchanges) — Cornell Legal Information Institute
- Topic No. 410 Pensions and Annuities — Internal Revenue Service
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