During his 2014 State of the Union address, President Barack Obama unveiled a plan designed to encourage more people to save for retirement. The new account is called a MyRA, and it’s designed to be a sort of Roth IRA lite. Before you rush to open you account, however, you need to understand what it is, how it works, and whether or not you are eligible to contribute to a MyRA account.
How the MyRA Will Work?
The MyRA follows many of the same rules as a Roth IRA. You can contribute the same amount to a MyRA as you can to an IRA (up to $5,500 a year in 2014). Additionally, you make your contributions with after-tax dollars and the money in your account grows tax-free, so you don’t have to pay taxes on it when you withdraw money from the account later on.
On top of that, you can withdraw your contributions at any time, penalty-free. However, as with the Roth IRA, if you try to withdraw any of your interest earnings prior to reaching age 59 1/2, you will be penalized.
Unlike the Roth IRA, though, you don’t have a choice as to where you will invest the money. The money is kept in what amounts to a savings account. The earnings are pegged to the Thrift Savings Plan Government Securities Investment Fund. On top of that, your principal isn’t at risk with the new MyRA, as it would be with a Roth IRA. Your principal is guaranteed by the US government with the MyRA.
The Thrift Savings Plan Government Securities Investment Fund saw an average annual return of 3.6% between 2003 and 2012 — but only had a return of 1.5% in 2012. As you might imagine, the returns aren’t going to be huge. But the idea is to encourage savings, in the hope that those who are wary of losing money in Roth IRA or other investment account will be willing to put their money into an account they view as secure. Another bonus to having a MyRA account is that there aren’t administrative fees to worry about.
You can’t keep your money in a MyRA indefinitely, though. After you’ve had the account for 30 years, or if the balance reaches $15,000, you have to roll it over to a regular Roth IRA in the private sector.
Who Can Open a MyRA?
The MyRA is targeted toward those who do not have access to a retirement account through work. This might be due to the fact that their work does not offer retirement account options, or that the workers are part-time, and not eligible for benefits.
To start with, the government is offering the program through employers. They won’t have to administer the plans, or contribute to them. However, the MyRA isn’t going to be limited just to those who don’t have access to a retirement account through work. After the pilot program ends and there is full implementation, anyone who has direct deposit for a paycheck can sign up.
Initial deposits are as low as $25, and it’s possible to have as little as $5 from each paycheck set aside in the myRA account. However, you can only contribute if you make less than $191,000 a year. Even someone who has an account through work, such as a 401(k), can contribute to a MyRA once the initial program is complete. That way, if you want to make extra contributions, and meet the income requirement, you’ll still be able make contributions to the MyRA in addition to contributions to other accounts.
Should You Invest in a MyRA?
This new type of retirement account does have the potential to encourage those who wouldn’t normally save start saving. The account offers a safe place to keep money, and you don’t need a lot to get started. And, while the yield is low, it is still likely to beat most savings accounts.
Over time, though, the MyRA account is unlikely to provide sufficient returns to fund a retirement. It can offer a tax-efficient way to diversify your portfolio if you want to add something similar to cash, but you probably shouldn’t rely on this account to supply all of your retirement needs.