In 1975, the federal government introduced Individual Retirement Accounts, or IRAs as they’re commonly known, to help average Americans save for retirement on their own. Since then, the government has rolled out more types of retirement accounts, including Roth IRAs and SIMPLE and SEP plans.
Now there’s another type of account we can add to the retirement plan alphabet soup: the myRA. President Obama announced the introduction of this new retirement plan during his State of the Union address last month, and he signed a presidential memo the very next day directing the Treasury Department to create the myRA. Two days later, a U.S. Senator proposed the establishment of USA Retirement Funds, a new private pension system into which workers would automatically be enrolled.
A Retirement Crisis
Both of these efforts are aimed at addressing what is shaping up to be a real potential crisis in the future: the failure of many Americans to save adequately for retirement. Studies indicate that half of all Americans have less than $25,000 in retirement savings. If this trend holds, and some of the dire predictions about the future solvency of Social Security come to pass, it’s hard to see how many baby boomers and younger generations are ever going to be able to retire.
The myRA was designed primarily with low- and middle-income Americans who don’t have access to a retirement plan at work — like a 401(k) plan, for example — in mind. This includes about half of all employees, according to the White House, and three-quarters of part-time workers.
Practically speaking, myRAs will operate very similarly to Roth IRAs. Employees can make after-tax contributions to their myRA accounts and then withdraw the money from their accounts on a tax-free basis after they retire. Contributions to myRA accounts can be withdrawn at any time and for any reason without paying a penalty, though earnings can’t be withdrawn until after age 59½ without incurring a penalty.
Another big benefit of myRAs is their portability. In this respect, they are kind of like a hybrid IRA-401(k): They are established at the workplace, like a 401(k), but they are individually owned, like an IRA. Therefore, employees can take their myRA accounts with them when they change jobs. Also, employees can make contributions to their myRA from more than one part-time job.The annual myRA contribution limit is the same as the contribution limit for traditional and Roth IRAs: up to $5,500 this year, or $6,500 if you are 50 years of age or over. (This amount will be indexed for inflation in future years.) Participation in myRAs phases out for individuals with modified adjust gross income (MAGI) between $114,000 and $129,000 and married couples with MAGI between $181,000 and $191,000.
Safety vs. Return
The biggest difference between the myRA and the Roth IRA is how money can be invested. Contributions to a myRA can only be invested in government savings bonds, which are backed by the full faith and credit of the U.S. government. Conversely, contributions to Roth and traditional IRAs can be invested in a wide range of stocks, bonds, mutual funds and exchange traded funds (ETFs).
The White House says that the rate of return on myRAs will be the same as the return on the Thrift Savings Plan’s Government Securities Investment Fund (which is available to federal employees), which was 1.5 percent in 2012. Between 2003 and 2012, this fund averaged a 3.6 percent return.
MyRAs feature very low opening balance and contribution minimums. A myRA can be opened with just $25, and contributions of just $5 per pay period can be made through payroll deductions. This will encourage some people who have put off opening a retirement account due to higher minimums to get started saving at least something for their retirement.
Also, a myRA can be converted to a Roth IRA without penalty at any time if you decide you would like more flexibility in how you invest your contributions. Once the account balance hits $15,000, or after it has been open for 30 years, you must roll it over into a Roth IRA.
A Retirement Cure-All?
While some politicians may tout the myRA as a panacea that will help cure the ills of the U.S. retirement system, many experts aren’t so sure. For one thing, the potential returns are so small that they offer investors very little long-term growth potential. Sure, they offer safety, but most retirement experts advise individuals with a long-term time horizon to invest at least some of their retirement savings in growth vehicles like stocks and stock mutual funds.
You should do a little digging before deciding if a myRA is the right retirement savings account for you. In particular, compare its features to a traditional or Roth IRA or a 401(k) if you have access to one at your place of work.
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