A new retirement savings vehicle, called myRA, was just made available to the public this past week.
The alternative retirement plan for individuals was first announced by President Obama in his State of the Union address in 2014, and after completing an initial pilot of the program, the U.S. Treasury Department announced last week that the myRA is now being offered nationwide.
The general idea of the myRA is to offer a simple, safe, no-fee retirement savings option designed for people who want to get started saving but don’t have access to retirement plans at work. Therefore, for workers with no employer-sponsored retirement plan, such as a 401(k), and those with very little money or knowledge to start their own investment accounts, the myRA option can be a good start.
Here are some of the basic features of the myRA:
- Like 401(k) plans, workers can have part of their pay deducted for deposit into a retirement plan.
- Instead of the usual choice of mutual funds, the savings are invested in U.S. government bonds.
- For tax purposes, it would be treated the same as a Roth IRA (tax-free earnings but not tax-deductible contributions).
- Available to people with annual household income up to $191,000 whose employers choose to participate.
Perhaps one of the best features of the myRA is that it can be transferred into a private-sector Roth IRA whenever the nest egg grows and the individual saver is ready to move on to another account type.
The myRA was meant to be a starter account, which is the best way to use this retirement plan because beginning good savings habits — the behavioral aspect of saving — is probably the biggest obstacle in the way of Americans initiating a savings plan.
Here’s How the myRA Works
For those thinking of using this retirement plan, here’s how myRA works, according to IRS.gov:
- Savers can set up automatic contributions.
- The account stays with you from job to job.
- Withdrawals from accounts can be made at any time without paying tax or penalty.
- The United States Treasury backs your investment.
- Interest earned is at the same rate as investments in the Government Securities Fund, which earned 2.31% in 2014 and an average annual return of 3.19% over the 10-year period ending December 2014.
- There are no setup costs and no ongoing fees.
- There is no minimum savings amount, so users of myRA can start with just a few dollars
- Like traditional and Roth IRAs, savers can contribute up to $5,500 per year (or $6,500 per year for individuals 50 years of age or older at the end of the year).
Is the MyRA Really a Good Idea?
Probably the greatest beneficiaries of the myRA are workers without access to a 401(k) plan. But traditional IRAs and Roth IRAs are also available to the same general population of people with earned income. So why not use an IRA instead of the myRA?
Yes, there are cost impediments to opening retirement plans, but IRAs are not expensive to get started and anyone with access to the Internet, and with minimal education, can open an IRA within minutes. For example, Charles Schwab offers mutual funds for $100 initial investment. I’m sure a balance of stocks and bonds, held in a mutual fund like Schwab Balanced Fund (SWOBX), would be a smarter long-term choice than just government bonds.
Is it safety that people want with retirement plans? If so, why not open a CD IRA at a bank to get started? Furthermore, the word “safe” is a relative term in the investment world. Saving money “safely” usually translates into earning interest below the level of inflation.
With all financial talk aside, and to end with a bit of cynicism, I find it difficult to believe that there are many people out there wanting to save for retirement and who also trust that the government can provide workable solutions to the everyday challenges of Americans’ lives.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
