In his State of the Union address, President Obama introduced the myRA account. It stands for “My Retirement Account.”
WHAT IS IT?
The myRA is a new variant of the Roth IRA, with the following features:
1. Contributions are after-tax, like a regular Roth IRA, not pretax like a regular IRA or 401(k) fund.
2. All gains accumulate tax-free.
3. The annual limit remains $5, 500 (or $6, 500 if you’re 50 or older) for all IRAs including myRA.
4. Your myRA account can only invest in Treasury bonds (current return just under 1.5 percent according to the Wall Street Journal, with a ten-year average of 3.6 percent).
5. All money contributed is guaranteed by the U.S. government, so you can’t lose.
6. It will have no fees. Uncle Sam will pick up whatever administrative fees there are, for employee or employer.
7. Withdrawal of the principal is tax-free at any time.
8. Withdrawal of the interest is tax-free if done after age 59 and a half.
9. The minimum to start is $25, with a minimum contribution of $5/month.
10. Once your myRA balance reaches $15, 000, you must transfer it to a regular Roth IRA.
11. You may switch to a Roth IRA earlier. The myRA plan is intended as a feeder, not a competitor, to traditional Roth IRA accounts.
12. The plan is not administered by an employer, but by an outside private firm (still to be nominated).
13. MyRA accounts will be offered through employers via payroll deductions. (Employer participation is not required.)
14. Workers can contribute from multiple part-time jobs.
15. According to the Treasury Department, it looks like the myRA program will only be open only to those who have direct deposit.
16. There will be an income limit. Only households earning up to $191, 000 a year will be eligible for the account ($129, 000 if you are single).
17. Employers won’t face any fees, fiduciary liability or reporting requirements — yet.
18. Your myRA is totally portable from one job to the next.
19. There’s no provision for employer matching.
This new vehicle is aimed at the following kinds of people:
- Those without money to open regular accounts
- Those without the discipline to save or invest (automatic payroll deduction takes care of that)
- Those without the knowledge of how to invest
- Those who are fearful of losing their money
- Those who are intimidated by brokers, company retirement plan experts or financial planners
- Those who work multiple part-time jobs
It always takes a few weeks to digest all the nuances of a new program, and myRA is no exception. Here are some of the most obvious benefits and drawbacks of the new program so far:
1. Safety: Warren Buffett’s famous first rule of investing is: Don’t lose it. With a myRA, you can’t lose the money you put in.
2. No fees: This is not a trivial benefit. More and more, traditional 401(k) funds are being criticized because their fees eat up most of their returns, which are often lower than the S&P 500 to begin with. Also, many employers refuse to offer retirement programs, because they get stuck with a bill for that. With myRA, nobody pays any fees.
3. Portability: The myRA program could be a first step in separating people’s retirement funds from their employers. This is not only valuable for people who change jobs, but also the increasing number of people who hold down multiple part-time jobs.
4. Administrative freedom: Freeing employers from administration and liability may bring more employers into the fold to help their employees with their retirement funding.
5. Automatic deductions: Psychologically, it helps participants by taking the money out through a payroll deduction — the principle of automating your savings (out of sight is out of mind).
6. Encouraging saving: The habit of saving, if created through this program, will succeed where others have failed. It’s not to create millionaires, but it can help create that saving habit.
7. Simplicity: It avoids the intimidation workers face when they’re presented with having to make investment choices between a bewildering array of funds with names that all sound the same.
8. Emergency fund: Something not envisaged by the creators, the myRA might end up being the perfect way to start an emergency fund: principal withdrawals are tax-free and unrestricted, and the interest rate is almost double that of a regular savings account. Not to mention the deductions are automatic.
9. Cash return: A myRA will be a perfect place in which to store the cash portion of your investment portfolio, because of the low risk, and the return: higher than money market funds and savings accounts.
No government program is perfect, and critics wasted no time pouncing on the proposal. One even went as far as to suggest this is all a communist plot by the government to unload all those bonds it has been buying from the Fed as part of the Quantitative Easing program. Please. A quick calculation, based on maxing out at $15, 000, exposes that criticism as nothing more than the old notion that “haters will hate.”
Others pointed out that myRA will not solve the retirement crisis, but it wasn’t designed to do that in the first place.
It was designed to get more un-involved people into the mindset of saving, by making the entrance into the system easier and risk-free.
Nevertheless, there are some real drawbacks:
1. A low return is the quid pro quo for no risk. (However, when you consider the after-fee return of 401(k) or IRA funds, it doesn’t look quite as bad.)
2. Employers are not required to sign up. One of the big elements of America’s retirement crisis nobody talks about is the fact that many people are shut out of the current system by employers who simply refuse to participate. The myRA program doesn’t address that problem, so many (if not most) of the workers this is aimed at will still be shut out of a tax-advantaged retirement savings plan.
3. The only means of contributing is by direct deposit. Those who are paid by cash, debit card or check are excluded. That’s unfortunate because I suspect there’s a big overlap between this group of workers and the group the Administration is trying to help.
4. It doesn’t address the main problem behind retirement — under-funding. Lance Roberts, chief executive of STA Wealth Management, a Houston-based money manager, was quoted in the Washington Post as saying, “If you look at all the options out there — IRAs, Roth IRAs, savings bonds — the reality is that there are plenty of savings vehicles out there. Having vehicles to save money is not the problem. The problem is having money to save.” And, of course, the willingness to make sacrifices to save.
In terms of the overall problem — not enough Americans are saving enough to fund their retirement — the program can best be described as good, but modest.
The myRA is aimed at filling a gap in the current array of retirement savings vehicles, and it succeeds to a great degree.
It will draw in more savers if more employers can be enticed to participate (it’s free to them) and if it can be done without requiring direct deposit.
I’m retired, so I don’t have direct deposit (because I don’t have a job, happily). But if I was able to, I’d definitely use a myRA for at least my emergency fund.
How about you? Can you see a myRA in your future?