A New Retirement Account for Americans

A New Retirement Account for Americans

For 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.

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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 Another key difference between the myRA and its counterparts is that your contributions can be withdrawn at any time without incurring tax penalties.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.)

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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.

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