The good and bad of the new 'myRA' retirement plan
What’s all this talk about myRA? After President Obama’s State of the Union address a few weeks ago, the country has been abuzz with this new retirement account called myRA. In his address, Obama introduced a government-backed retirement plan targeted at the millions of low to middle-income Americans who do not have access to employer-sponsored retirement accounts and, therefore, no retirement savings. It is estimated that non-retirement savers make up approximately half of the workforce, having to rely solely on social security in retirement. myRA is not designed for workers who are already accumulating a nice nest egg for retirement.
The myRA is similar to a Roth IRA in which workers deposit after-tax income and withdraw tax-free funds in retirement; however the big difference between the two is where the funds are invested. A Roth IRA lets the saver choose which assets to invest in, whereas with a myRA the funds can only be invested in government savings bonds that are backed by the U.S. Treasury. The savers can never lose their principal, making the myRA virtually risk-free. This safety does, however, come at a big cost. The return will be the same as the return on the U.S. Thrift Savings Plan's Government Securities Investment Fund, which has had a five-year average return of a paltry 2.7 percent. Although the return is very low, the myRA account has no fees, which in other types of retirement accounts can eat up a portion of the earnings.
Once the federal government has the myRA fully in place, anyone who has direct deposit for his or her paycheck will be able to start an account. The initial investment can be as low as $25 and additional contributions can be as little as $5. As with a Roth, the current maximum amount that can be contributed each year is $5,500. As long as a worker’s household income falls below $191,000, he or she can contribute, even if covered by a 401-k plan at work. The saver can switch his or her myRA to a Roth at any time; however when the balance reaches $15,000, or the account has been opened for 30 years, the saver must roll the balance over into a private sector Roth account.
The benefit of the myRA is that it gives access to those who have never saved a simple and secure way to begin saving. The negative is the low return, so it will be difficult to amass a substantial nest egg. Yet, in my opinion, any savings is better than no savings. This type of account may be what it takes to get those workers who do not save for retirement on board. Ideally, once saving becomes a habit, workers saving in a myRA will opt for the higher risk/higher return that a Roth IRA can offer.