Chances are, you have heard about the new myRA retirement savings program that was proposed by President Obama during his State of the Union speech. But what is it? And how does it relate to the array of other retirement savings options you already have (i.e. Traditional and Roth IRAs, 401(k) and/or 403(b) plans)?
The new account, which is scheduled to be introduced later this year, will be offered to workers who currently do not have access to any kind of retirement program through their employers. Remarkably, this underserved population is actually close to half of all workers. Most of this eligible group are from small companies which have trouble affording the cost of creating and administering a 401(k) plan. The idea is that a myRA account would be so easy to install and implement (employers don’t have to administer the invested assets), and cost so little that many of these smaller companies would immediately give their employees this savings option.
Only some of the employees would be eligible, however. Married couples earning more than $191,000, or singles earning more than $129,000, would be excluded from making myRA contributions. And there is currently no law which says that employers would be required to offer these plans. So the first thing to understand is that people who already have a retirement plan at work, or who earn more than the thresholds, should not give the myRA option a second thought.
Additionally, these people should think twice about shifting to this option if given the opportunity. Why? myRA functions like a Roth IRA, which means that contributions are made with after-tax dollars, but the money will come out tax-free. Anybody can make annual contributions to a Roth IRA; the 2014 maximum is $5,500 per individual; with a $1,000 catch-up for people older than 50–and these are the same limits that will be imposed on the myRA.
BUT the biggest issue is that the myRA is not really an investment account. Any funds that are contributed to a myRA account earns interest from the federal government and will be invested in government bonds. Why does that matter? Retirement accounts that invested in the stock market earned close to 30% from their stock investments last year. The government bond investments that would have gone into a myRA earned 1.89% last year–which is below the inflation rate. In real dollars, that was a losing investment.
A second big issue is the employer match. Many workers who have a traditional 401(k) account get some of their contributions matched by their company, which effectively boosts their earnings. myRA accounts will get no such employer match.
Besides those two issues, there is a provision that whenever a myRA account reaches $15,000, it has to be rolled into a Roth IRA, where the money can be deployed in stocks, bonds or anywhere else the account holder chooses. The program seems to be designed to encourage younger workers to start saving much earlier than they currently do. Statistics show that the median retirement account for American workers age 25-32 is just $12,000, and 37% have less than $5,000.
Will they be motivated to save when myRAs roll out at the end of the year? Some commentators have noted that the money can be taken out of the account, for any reason, at any time, with no tax consequences. That is not a great formula for long-term savings. But it does make the myRA account a convenient way for a worker just starting out to build up a cash reserve which could serve as a cushion against job loss or unexpected expenses like car repairs. If it is not needed, the account could eventually grow into a retirement nest egg.
Article written by Bob Veres of Inside Information
Sources:
http://www.dailyfinance.com/2012/11/14/retirement-savings-by-age-how-do-you-compare/
http://www.marketwatch.com/story/the-trouble-with-obamas-myra-plan-2014-01-31
http://www.foxbusiness.com/personal-finance/2014/02/12/what-all-fuss-about-myra-accounts/