State of the union: what is MyRA? Success or failure? What we know now.

State of the Union #myRA My Retirement AccountKJ: So without getting into any of the politics from the State of the Union, we wanted to bring a quick summary about what this new myRA account is all about (i.e. with many wondering if myRA is a new account, if it’s like a Traditional IRA, or is myRA more like a Roth IRA?…all things we hope to clarify in this post). While there are a lot of details to be ironed out, the program is designed to be made available in 2015 with some early adopters starting the program in late 2014. There are quite a few good articles out there, but here is the Whitehouse.gov press release with some additional reading. Here is what you should know now:

What it is:
(1) Another confusing acronym that sounds eerily similar when pronounced to the already existing IRA. Wait, are you saying myRA, my IRA, or just IRA? Are you saying Myra (as in the person – a mistake a number of people have made on Twitter putting @myra instead of #myRA – oops!) or my RA (as in rheumatoid arthritis or residential adviser – college dorm term). All-in-all, just a bad name choice in my opinion.
(2) A Roth IRA equivalent – The participant does not get any tax advantages today for contributing to the account today (it is “after-tax” money meaning you don’t take any current year tax deductions for what you put into the account), but it grows tax-exempt, just like a Roth IRA. Plus, an account owner can roll the funds over to a Roth IRA at a financial institution (and will be required to do so after they have accumulated $15,000 or have been invested for 30 years) at any time.
(3) Your own savings. It’s not a plan or account that the employer controls or has any say in. Really, their only involvement is to process payroll deductions and then send the funds to the Treasury for deposit into your myRA. Plus, if you leave your employer, the account is yours to take with and do what you want – and fund it again with your new employer. Thus, it has a lot of the portability benefits that a Traditional IRA or Roth IRA has.
(4) Your myRA contributions are protected from investment loss. Guaranteed by the Treasury, and the same “G” – government securities – investment option in the Thrift Savings Plan (TSP) for government employees in their workplace retirement programs, it will not lose principal. Check out the TSP website on historical performance for more on this fund.
(5) A way to help those save for retirement who don’t have a workplace retirement option available. However, just because you don’t have a workplace 401(k), does’t mean you have NO options on saving for retirement. See our post on how to save for retirement if you don’t have a 401(k) for some further reading.
(6) There are no tax penalties for taking a withdrawal. Much like a Roth IRA, for money you put into the account, you don’t have a penalty or taxes owed on money distributed. However, there are likely to be restrictions (much like a Roth IRA) for earnings in the account if withdrawn before a certain age and an exception doesn’t apply (read, taxes and penalties could apply to the earnings).

Who it is for:
(1) It’s touted to be for anyone who doesn’t have a workplace retirement account they can save for. Well, not EVERYONE would be eligible. It is designed to be a retirement plan that you can contribute to at work through payroll deductions, but the employer has to actually offer it as an option when processing payroll. At the current time, it sounds like it could be in addition to a 401(k), instead of a 401(k), or instead of another workplace retirement account. So, while it could be available for all, there currently isn’t a mandate that employers actually offer it as an option.
(2) Couples making less than $191,000 per year (and a lower threshold for single tax filers at $129,000 per year). It doesn’t quite say that this is when the phase-out begins (or ends) for being able to make contributions, but it sounds quite similar to the maximum income to be able to contribute to a Roth IRA for married couples.
(3) Those looking to start saving for retirement with very little money each paycheck. With contributions as low as $5 per paycheck, and minimum investments of $25, it is arguably both approachable and affordable for all families.

What are my thoughts?
(1) While a guarantee against loss of principal sounds (in theory) like a good option compared to the volatility you see in a private investment strategy (think bonds, stocks, etc.), at what long-term savings cost is this guarantee? Even just earning an extra 0.5% or 1% on your money over the long-term (though subject to periodic market swings) would equal THOUSANDS of dollars of extra retirement money. The key is holding your ground and staying invested and not panicking at the bottom of the markets. Markets fluctuate quite regularly (anyone look at their statements from January?), so learning this early in your investing career can equip you to focus long-term (i.e. 5, 10, 15, 20 years).
(2) Depending on someone’s income, it could be an interesting opportunity to get some additional funds into the myRA, then roll over to a Roth IRA, so you can ultimately get more funds in the great account that is a Roth IRA. Note that this could be severely limited pending further discussions on whether contributions to the myRA are the same limits subject to Traditional and Roth IRAs, so those maximizing their existing Roth IRAs may not be able to contribute anything to the new myRA.
(3) How can a maximum account value of $15,000 with the new myRA be enough to help America’s retirement problem? Assuming you spent the money in one year (not to mention trying to LIVE off of the account on an ongoing basis), that’s barely enough funds to provide for one year of income at the Federal poverty level, yet it’s the maximum you can save in the account? Sure you can roll the funds over to a Roth IRA above this threshold (then the sky is the limit on your account value), but what kind of cap is $15,000?
(4) It can be a good way to get people to START to think about saving for retirement and saving for their future at even a low threshold.
(5) Why do we need another account? Can’t there be solutions to enhance existing options? Is it me, or are there just too many account types out there: Traditional IRA (wait, is a portion deductible or non-deductible?), Roth IRA, SEP IRA, SARSEP IRA, SIMPLE IRA, HSA, MSA, FSA, 401(k), 403(b), TSP, TRS, 457, PSP, checking account, savings account, trusts, credit cards…anything I’m missing?

What is still to be determined:
(1) What are the exact income limitations, and is there a phase-out?
(2) How much can you actually contribute each year?
(3) How does the contribution impact your total contributions to Traditional IRAs/Roth IRAs (up to $5,500 per person for 2013 and 2014) and other retirement accounts? Will it be a new type and completely separate contribution limits or will it combine with your existing IRA limits?
(3) What is the process for when you have had the account for 30 years or when the balance reaches $15,000 and must be rolled over to a private retirement account (i.e. Roth IRA)?
(4) Will this become a requirement for employers to offer at some point?

    What have you read about the new myRA?
    Will you be keeping up with this new account type?
    What would motivate you to contribute to this new account?

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5 thoughts on “State of the union: what is MyRA? Success or failure? What we know now.

  1. Again, it is with Thanksgiving I read your discussions on things I would otherwise not understand. Very helpful!

  2. I like how you laid this out and explained what we know and what we don’t know. That being said I think the myRA is a way to get poorly informed investors to invest in terrible government debt. It isn’t even indexed to inflation like TIPS are so yes, you could be losing some principal due to inflation.

    If they don’t set and income limit on this, or these contributions don’t count against your total IRA contribution limit then this could be another way that the “rich” could protect some assets.

    In the end, and this is just my opinion, most of the those investing in this account would be better off just opening a ROTH or Traditional IRA and not buying terrible government debt.

    • Yeah, depending on what they do with the income limits, it very much could just turn into another tool for the wealthy to protect additional assets. I agree too about not being a great long-term investment strategy – particularly as you mentioned with the concept of “purchasing power” that could be eroded over time due to inflation. I think one of the main things they are playing off of is overall lack of knowledge of investing (on what is a stock, what is a bond, where to invest, how to invest, etc.) and they are feeding the “fear” side of the equation. People can setup a traditional IRA regardless of income (just depends on several factors as to whether or not they can deduct the contribution), and you can easily setup an “auto-transfer” each month on a set date that would act just like the concept of a payroll deduction.

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