In the 2014 State of the Union address, President Barack Obama proposed a new type of retirement savings account known as myRA or My Retirement Account. The idea of this new savings vehicle has stirred up waves of controversy. Although most Americans can agree that retirement readiness is an issue that needs to be addressed, some argue that a myRA isn’t the best platform. There is a debate that myRA simply bridges a savings gap for low to middle income workers. Reports show that nearly half of working Americans don’t have a traditional retirement account offered through their workplace.* It is likely that this statistic takes into account part time workers and those workers who haven’t been with their employers long enough to participate in the company’s savings plan.
MyRA, is a hybrid of a savings bond, which is backed by the government, and a Roth IRA, which allows contributions to be withdrawn tax free. The myRA appeals to low income workers because it can be opened with a minimal initial deposit of $25. Unlike a 401(k), the myRA wouldn’t have the added benefit of contribution matching from the employer and the myRA owner will only have one investment option. The interest rate will be based on what federal employees receive from their Thrift Savings Plan fund. The accounts will hold a maximum of $15,000 or be active for 30 years, whichever comes first. After that, funds will be rolled over into a private sector IRA.
Quick Facts about myRA
1. Any individual making under $129,000 a year or couples making less than $191,000 a year will be able to open a myRA;
2. Minimum initial deposit of $25 then minimum $5 after-tax contributions through automatic payroll deductions each payday thereafter;
3. Limited to one investment option- US government savings bonds
4. No matching employer contributions;
5. Principal Contributions can be withdrawn penalty- and tax-free at any time. Earnings can be withdrawn tax free for those over 59½;
6. Once accounts reach $15,000, or 30 years of age (whichever comes first), they must be rolled over into a private IRA;
7. myRA will be launched via the President’s executive order, bypassing congressional approval;
8. There will be no fees associated with the accounts (many suspect tax dollars pay for the administrative fees);
9. Contributions are not limited to one place of employment and continue to accrue savings after job switches; and
10. myRA is expected to be available in late 2014
If you are someone who doesn’t have a workplace savings plan, or who doesn’t have $500 to open an IRA account, then myRA might be the jumpstart you need to begin saving for retirement. There are a few benefits to myRA; salary deferrals are automatically deducted from your paycheck, making it easier to save, the minimum deferral amounts are low, and the cost to open the account is only $25.
A qualified retirement plan sponsored by an employer or even a personal IRA are far more superior to a myRA. The array of investments available in either is much wider than the myRA offers. The opportunity for growth from earnings is much higher in an employer plan or personal IRA. With the myRA you are limited to investing only in government bonds whose interest rates are so low that some advisors worry the money deposited won’t even grow fast enough to keep up with the rate of inflation.
In my opinion, the myRA doesn’t come close to solving or even addressing the retirement savings crisis we face in America. Americans already have access to IRA accounts. However, studies show that employees are far less likely to save in an IRA account on their own and far more likely to save for retirement when they have access to an employer sponsored qualified plan. And even if an individual does open a myRA, contributions of $5 per pay period will not result in a dignified retirement. We must find a better solution to the retirement crisis.
I believe, that if we truly want more Americans to be able to have a dignified retirement, those making policies should be finding ways to encourage more businesses to sponsor 401(k) plans and include matching contributions. Policy makers should be encouraging employers to use automatic enrollment in their 401(k) plans and increasing the deferral limits and the deferral levels that can be matched in a Safe Harbor 401(k) plan. They should also be removing the ability to take loans against retirement accounts or at least significantly limiting them. Instead President Obama is introducing myRA and Congress is considering dramatic changes to the current qualified plan rules that would remove most incentives that business owners have to offer these plans to their employees.
What are your thoughts on the new myRA accounts? Let us know in the comments below.
-Shannon Edwards, ERPA, QPA, QKA, APR
References: *Retirement Study US Department of Treasury, 12 Things you should know about myRA