A New Retirement Account for Americans

Libby Kane
Posted

President Announces myRAFor as long as most of us have been contributing to a nest egg, we’ve essentially had three major types of retirement accounts to choose from.

There’s the Traditional IRA, which gives you tax benefits on your contributions now; the Roth IRA, which carries an income limit and gives you a tax break on your withdrawals later; and the employer-sponsored 401(k).

Welcome a newcomer to the fold: the myRA.

In President Barack Obama’s 2014 State of the Union address on Tuesday, he announced that he would be directing the U.S. Treasury to establish this new vehicle for retirement savings. On Wednesday, he issued the order via presidential memorandum.

The myRA, intended as a “starter account” for the roughly half of American workers that don’t have access to employer-sponsored retirement plans, will be available to married couples with incomes under $191,000 and individuals earning less than $129,000. But it doesn’t have to be your first retirement account—those looking to supplement an existing 401(k) can also open a myRA.

MyRAs are closest in nature to Roth IRAs, in that your contributions are post-tax and your withdrawals are tax-free. But unlike the other types of retirement accounts, there is only one invest option: a Treasury bond, which is guaranteed by the government. That means you’ll never lose your principal. As the President put it, “MyRA guarantees a decent return with no risk of losing what you put in.”

Admittedly, your money might not increase as fast as it might in another type of retirement account, as government savings bonds tend to have low yields. It’s a typical less risk, less reward scenario. Another key difference between the myRA and its counterparts is that your contributions can be withdrawn at any time without incurring tax penalties. (If you try to withdraw the interest earned before age 59 1/2, however, you will face a tax penalty, similar to the Roth IRA.)

RELATED: Want to Save for Retirement? Start Here

A would-be saver can open a myRA with as little as $25, and contributions can be a mere $5 a month, taken from a worker’s paycheck. Once the balance of the myRA reaches $15,000, however, the owner will be required to roll it over into a private-sector IRA.

While it’s too soon to tell how successful the myRA could be (the pilot users will be employees whose companies sign up to offer the option in 2014), we tip our hats to any vehicle, process or incentive that encourages people to start saving for retirement. After all, when you start saving could be just as—if not more—important as how you save, because there’s no such thing as making up for lost time.

  • BoomerangRetiree

    The myRA sounds reasonable for those who are starting their retirement savings from scratch and cannot meet the minimum investment requirements for an IRA or mutual fund account. This minimum varies from $1,000 at T. Rowe Price to $2,500 at Fidelity to $3,000 at Vanguard, so a person saving $5 per week would have to stay in myRA for a few years before (s)he could open an IRA.

    But workers need to clearly understand that myRA is only intended as a starter and is not meant to be the core of a retirement savings plan. Its returns are in line with Treasury bonds and will not be adequate to accumulate sufficient retirement savings. Workers need to understand that as soon as they have a couple of thousand in myRA they should roll the funds over into an IRA and invest for growth.

    Obama did not make the purpose and limitations of myRA clear to the average worker, either in his speech or in the way the law is structured. His speech said that myRA “guarantees a decent return” and some people won’t realize that this return is nowhere near that of a stock-index fund or a 2040 target-date fund. And the law allows a person to stay in myRA until the account reaches $15,000. I suspect that more than a few low-income workers, uninformed about investing, will do just that: they’ll continue to put $5 a week into this low-return myRA and find themselves with barely $15,000 at age 60. By then it will be too late to move into higher-growth, higher-risk investments, and they will be just as close to poverty as if they had never saved at all.

    I think that in order for myRA to work at all, the law will have to be revised to require IRA rollovers at a much earlier point in time–when the myRA account reaches the $1,000-$3,000 balance that is in line with minimum initial mutual fund investments. This means that a young worker saving $5 a week would accumulate the minimum IRA investment, open an IRA, and start investing for growth in his/her late twenties or early thirties. (S)he’d then continue saving in myRA, and roll over the balance each time it reached the minimum subsequent investment for the IRA, which is typically $100.

    Of course, if this worker continued to save only $5 a week, then even with a growth investment (s)he’d only have about $50,000 at age 67. But if the savings were increased by $1 a week every year, (s)he’d end up with over $150,000 at age 67–still not enough to retire on, but better than if (s)he’d stayed in myRA indefinitely.

    • Rosie

      I agree with all of your points here – this plan isn’t enough to help anyone actually retire comfortably. However, as a 26-year-old who opened a traditional IRA about a year ago, and can only afford very small weekly contributions, I like that this plan advances the following notion: that starting to save as early as possible, even if it’s $1 per week, or $5 per month, is better than not starting at all. Most people my age haven’t even thought about opening a retirement account. They have student loan or credit card debt and they (understandably) feel that is more important to deal with right now. But while paying down debt is important, we all need to change our habits to include retirement savings as a non-negotiable regular “expense.” I figure if I can get used to setting aside $10 per week now, 6 months from now I can do $15 per week, and so on. I wish other people my age would see that starting small is better than waiting, and I think this move by the president places this important idea in people’s minds.

  • rjsan15

    It is completely and utterly unconstitutional for a President to put this type of system into place without going through the proper legislative channels of Congress. The fact that another commenter here referred to this as a “law” is a clear indication that without Congressional support, this is just another empty promise from a politician who thinks he/she is above the operational procedures outlined in our country’s founding documents.

    • PeopleAreUnbelievable

      If it was “unconstitutional” he wouldn’t be able to do it. There’s obviously something in the Constitution that allows the President – ANY President – to use the power of his Executive Order.

      And the fact that you’re whining about something meant to HELP the majority of Americans who don’t have access to employer-funded retirement plans is disgraceful.

      Go check how many Presidents have used Executive power, and for WHAT before you complain.
      You should be ashamed of yourself.