They Call the Plan "MyRA"

November 16, 2015 10:30 AM
By Brian Dobbis
896 Views

The Treasury Department introduced a new no-fee, low-risk retirement program for workers who don’t have employer-sponsored savings plans.

THE ROAD TO RETIREMENT with BRIAN DOBBIS

A new starter retirement savings account has arrived, courtesy of the federal government. On November 4, the Treasury Department announced the nationwide rollout of “myRA,” which stands for "my retirement account."

Initially unveiled during President Obama’s State of the Union address in 2014, myRA is a simple, low-risk, no-fee retirement savings option designed for people who don’t have access to employer-sponsored retirement savings plans, such as the popular 401(k).

Essentially, the program is a stripped-down Roth IRA with limited investment options (actually, only one, which we’ll address below). As with Roth accounts, myRA contributions are not tax deductible but grow tax-deferred, and distributions are tax-free if certain criteria are satisfied. MyRa contributions qualify for the Saver’s Credit, assuming the investor’s income qualifies.

Similar to a Roth IRA, not everyone can contribute. Eligible investors are limited to maximum income thresholds of $131,000 for singles and $193,000 for couples. There also are limits on the amounts that can be contributed annually—$5,500 ($6,500 for those eligible taxpayers age 50 and older). There are no requirements for employer-matching contributions. Additionally, there are no minimum balances required, and contribution minimums start as low as $2.

According to the government site www.myra.gov, taxpayers have three ways to contribute: direct debits from paychecks, checking or savings accounts, or federal tax refunds.

MyRA actually has been in pilot testing for a year. During the launch announcement, Richard Ludlow, executive director of myRA at the Treasury Department, noted that the plan was designed specifically to mollify employers’ concerns about fees involved in setting up workplace savings plans, and to assuage workers’ concerns about costs and having to make “complicated” fund choices, as well as their general concerns about market risk.

But the features that make myRA so safe and easy to use also contribute to what critics perceive as drawbacks to the plan. MyRA offers a single investment option—a new type of Treasury savings bond, whose principal is guaranteed and which earns the same variable rate as the Government Securities Fund offered in the federal employees’ Thrift Savings Plan (TSP). According to the Treasury, that fund has earned an average annual return of 3.19% over the 10-year period ended December 31, 2014.The interest rate on the U.S. Treasury on the day the program was launched was 2.125%.

Building on the Plan
The desired goal of the myRA is to introduce people to the concept of saving for retirement—and the earlier the better. Investors can transfer their accounts into a private-sector Roth IRA (but not a Roth 401(k)) at any time if, for example, they want to invest in a more diversified portfolio. They will be required to transfer myRA assets to a private, investible, account once the account reaches $15,000 or 30 years of existence. Investors who contribute the annual maximum of $5,500 will have to transfer their account in as little as three years. The government hopes people will continue to invest in the account after it is converted.

Mark Iwry, deputy assistant secretary for retirement and health policy at the Treasury Department, emphasized during the launch announcement that the myRA program was not set up to compete with employment-based plans. Rather, he encouraged employers who were interested in providing matching contributions to consider setting up a “regular” plan, such as a 401(k).

"MyRA was developed for individuals looking for a simple, safe, and affordable way to start saving and investing,” said Dan Watson, the Treasury’s spokesman. “It’s a starter account that serves as a bridge to other retirement savings and investment products. At any time, savers can transfer their funds to a private-sector Roth IRA where they can continue to watch their savings grow," he added.

Treasury secretary Jacob J. Lew acknowledged that “myRA alone will not solve the nation’s retirement savings gap, but it will be an important stepping stone for encouraging and creating a nation of savers.”

The key, Lew said, is “taking the first step and putting that first dollar aside… Over time, you’ll watch your savings grow into the foundation for a secure retirement.”

What are your thoughts on this new vehicle to encourage people to save for retirement? Join the investment conversation below. 

 

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