MyRA – Is It Anything To Be Excited About?
If you watched President Obama’s State of the Union address on January 28th, you may have heard him mention a new type of “starter” retirement savings account, to be known as a MyRA ( rhymes with Tyra, Kyra, Lyra and even Elvira). The President said he was going to bypass Congress and institute the MyRA via executive order. On the very next day he signed a presidential memorandum to give the Treasury the go-ahead to start the MyRA program. (We will leave the debate on the political significance of this to others.)
In a nutshell, the new MyRA is essentially a Roth IRA with very low investment minimums that invests in U.S. treasury bills where there is no risk of losing what you put in. MyRA’s can be started with initial investments of as low as $25 initially and $5 per paycheck. The accounts are set up with the individual’s employer, so that the payroll deductions are done automatically with each paycheck. There is no cost to the individual or the employer as the Federal Government is picking up the tab, and the employer bears no responsibility other than setting up the payroll deductions and remitting the funds to the U.S. Treasury, who will be administering the plan.
The whole program is geared towards savers who do not have access to employer sponsored retirement plans or are looking to supplement an existing plan. Sure, these people could sign up for Roth IRA’s on their own, but they rarely do. A 2010 study by the EBRI (Employee Benefit Research Institute) discovered that for people whose earnings were in the $30,000 to $50,000 range, just 5% of those without an employer sponsored retirement plan were utilizing their own IRA’s. Meanwhile, 72% of those who were covered by an employer sponsored plan were contributing to the plan. We will have to wait and see if the process of signing up for a MyRA will be as simple as Mr. Obama intends it to be.
The only investment available (and fortunately, Wall Street is not involved, so there are no fees for “products”) is the Federal Reserve “G” Fund which, according to the Government Thrift Savings Plan website :
The G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a nonmarketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money.
Since it only invests in ultra-safe government treasuries, the long term returns are likely to be pretty paltry, and would not be the optimal investment for younger savers, who have many years to ride out the ups and downs of the stock market and receive a higher long term rate of return. Last year, the G fund earned 1.89%, following 1.47% in 2012. The President said in his State of the Union address that “the MyRA guarantees a decent return (that is debatable) with no risk of losing what you put in”. It is true that there is no risk of loss, but the very low returns of risk free bonds do have the risk of not keeping up very well with inflation over time. Thus, the risk is that of purchasing power and staying ahead of inflation, although the principal is safe.
Other details of the MyRA:
- There is no employer match on funds contributed to the MyRA. In fact there is no requirement for employers to even offer the accounts as of now. However, lower income savers, meaning individuals with gross income up to $30,000 and couples up to $60,000 are eligible for a savers credit of 10% to 50% of their contributions, depending on their income.
- The same income limits for being able to make contributions still apply, which means your Gross income must be below $129,000 for individuals and $191,000 for couples.
- The account works like a Roth IRA, which means contributions go in after-tax, but will grow tax free, and are tax free if withdrawn after age 59 ½ and have been the account for 5 years. If funds are withdrawn before age 59 ½ they are subject to income tax penalties and taxes. However, you can pull your principal out at any time without penalty.
- The account is portable, which means that if you change jobs, you can continue to fund the accounts.
- Once the MyRA balance reaches $15,000, it must be rolled into a traditional private-sector Roth IRA. ( A private sector IRA would be with someone such as Schwab, Fidelity, Vanguard, etc.)
- You would only be allowed one MyRA, so once your balance reaches $15,000 and is rolled to a private sector IRA, you cannot open another one.
- There are no other investment options, other than the “G” fund mentioned above.
- You cannot contribute $5,500 to a MyRA and make additional contributions to another IRA. Your individual limit is $5,500 in total for all IRA’s, $6,500 if you are over age 50.
This might be a way to encourage some people who otherwise may not be saving to start putting something away for retirement. However, for many, it will be a very small amount and people may be tempted to take money out when a perceived need arises. It probably will not add much to retirement savings and seems much ado about nothing.
There are still some details to be worked out, and over time, the rules may change, but as of now, this is what the new MyRA looks like. It doesn’t add anything new for saving for retirement that cannot already be done.